The Bank of Japan shocked global financial markets yesterday by expanding its massive stimulus spending in a stark admission that economic growth and inflation have not picked up as much as expected after a sales tax hike in April.
BOJ governor Haruhiko Kuroda portrayed the board’s tightly-split decision to buy more assets as a preemptive strike to keep policy on track, rather than an admission that his plan to reflate the long moribund-economy had derailed.
But some economists wondered if pushing even more money into the financial system would be effective as long as consumer confidence continues to worsen and demand remains weak.
“It’s clearly a big surprise given Kuroda’s repeated insistence that policy was on track and assorted politicians have been warning about the negative side of a weak yen currency,” said Sean Callow, a currency strategist at Westpac.
In a rare split decision, the BOJ’s board voted 5-4 to accelerate purchases
“We salute the BoJ for admitting that they weren’t going to reach their goals on inflation or GDP, though we do note that the new policy equates to about $60 billion of quantitative easing per month. This perspective does raise the question of just how much impact monetary policy is having.”
The jolt from the BOJ, which had been expected to maintain its level of asset purchases, came as the government signalled its readiness to ramp up spending to boost the economy and as the government pension fund, the world’s largest, was set to increase purchases of domestic and foreign stocks.
“We decided to expand the quantitative and qualitative easing to ensure the early achievement of our price target,” Kuroda told a news conference, reaffirming the BOJ’s goal of pushing consumer price inflation to 2 per cent next year.
“Now is a critical moment for Japan to emerge from deflation. Today’s step shows our unwavering determination to end deflation.”
Kuroda said the BOJ’s easing was unrelated to major portfolio changes by the Government Pension Investment Fund (GPIF) also announced yesrterday, but the effect of the day’s two major decisions means that the central bank will step up its buying of Japanese government bonds, offsetting the giant pension fund’s increased sales of them.
The BOJ’s move stands in marked contrast with the Federal Reserve, which on Wednesday ended its own “quantitative easing,” judging that the US economy had recovered enough to dispense with the emergency flood of cash into its financial system.
In a rare split decision, the BOJ’s board voted 5-4 to accelerate purchases of Japanese government bonds so that its holdings increase at an annual pace of 80 trillion yen (£448.06 billion), up by 30 trillion yen. The central bank also said it would triple its purchases of exchange-traded funds (ETFs) and real-estate investment trusts (REITs) and buy longer-dated debt, sending Tokyo shares soaring and prompting a sharp sell-off in the yen.
Kuroda said that while the economy continues to recover, plunging oil prices, slowing global growth and weak household spending after the tax hike were weighing on price growth.
“There was a risk that despite having made steady progress, we could face a delay in eradicating the public’s deflation mindset,” he said. Before yeserrday’shock decision, Kuroda had been relentlessly optimistic that the unprecedented monetary stimulus he unleashed 18 months ago would succeed in bolstering an economic recovery and ending 15 years of falling prices.
But the world’s third-largest economy has sputtered despite the BOJ’s asset purchases and earlier government spending.
Most economists polled by Reuters last week had expected the central bank to ease policy again but not so soon. A majority had expected it to move early next year.
Economy Minister Akira Amari called the BOJ’s easing a timely move, saying the decision was related to but separate from Prime Minister Shinzo Abe’s looming decision on whether to raise the sales tax again next October, which would help rein in hefty government debt but risk a further economic blow.
In a semiannual report, the BOJ halved its growth forecast for the fiscal year to March to 0.5 per cent. It trimmed its CPI forecast for fiscal 2014 and 2015, but still expects to meet its inflation target within the two years it originally set out.