The Bank of Japan yesterday announced its most determined effort yet to end years of economic stagnation, saying it would switch to an open-ended commitment to buying assets next year and double its inflation target to two per cent.
There’s still a lot of room for improvement
It promised to reach the inflation goal “at the earliest possible time”.
The steps represent the latest unorthodox effort by a leading central bank to support a weak recovery from the global financial crisis, although in Japan’s case the country is also trying to overcome nearly two decades of low-grade deflation.
The BOJ’s break from an earlier policy of topping up a lending and asset-buying programme launched in October 2010 follows weeks of relentless pressure from new Prime Minister Shinzo Abe for a greater push to lift an economy out of recession.
In a joint statement with the Government, it affirmed a well-flagged move to commit to the inflation target. Consumer price inflation has reached two per cent in only a handful of months since the late 1990s.
But aware that markets had already factored in the new price goal and more asset buying and that merely meeting those expectations could trigger a negative reaction, central bankers took steps that several analysts thought would only come later.
“This is very good news. For once, the BOJ has been more aggressive than the market expected,” said Brian Redican, senior economist at Macquarie in Sydney. “The Government is clearly forcing the pace of change, which is no bad thing.”
The central bank said that from 2014, it would switch to an open-ended approach of buying a certain amount of assets – 13 trillion yen – each month without setting a deadline for completing the purchases.
By doing so, the BOJ, often criticised for its step-by-step easing, would be emulating the US Federal Reserve, though analysts were quick to point out that unlike the Fed, the BOJ delayed until next year the launch of the open-ended buying scheme.
Several analysts said the BOJ could still do more and there will be expectations that it will follow through with further steps mooted by politicians, economists and some central bank policymakers. One such step would be to scrap the 0.1 per cent floor for short-term interest rates, while another would be for the Central Bank to buy longer-duration bonds.
“There’s still a lot of work to do, and still a lot of room for improvement,” said Tadashi Matsukawa, head of fixed income at Pinebridge Investments in Tokyo.
Abe, who led his Liberal Democratic Party to a landslide victory in a December 16 parliamentary election and made aggressive budget and monetary stimulus a centrepiece of his campaign, hailed yesterday’s action as a game-changing breakthrough.
But many economists have warned the stimulus could give the sluggish economy only a temporary jolt if the Government fails to follow through with politically more difficult economic reforms such as deregulating its protected farming sector.
They also warn that the push to reflate the economy could backfire if Abe’s Government fails to convince markets that it has a credible plan to get Japan’s ballooning debt back under control.