Bank of Japan in boldest attempt yet to revive economy
The Bank of Japan announced on Tuesday 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 2 percent.
It issued a joint statement with the government promising to reach the inflation goal "at the earliest possible time," drawing praise from Prime Minister Shinzo Abe, who has piled relentless pressure on the central bank to take bolder measures to pull Japan out of deflation.
The decision to adopt asset buying with no end date had exceeded market expectations, analysts said. But Tokyo stocks fell and, after an initial selloff, the yen rose on investor disappointment that the expanded stimulus would not start until 2014.
"They've gone further than I thought by introducing the open-ended plan," said Joseph Capurso, currency strategist at Commonwealth Bank of Australia in Sydney.
"What surprises me is they won't start until 2014. That's very odd and different from what the Federal Reserve did, which was immediate," he said.
Having slashed interest rates close to zero, the BOJ's policy is the latest unorthodox effort by a leading central bank to try to boost an otherwise weak recovery from the global financial crisis and, in Japan's case, overcome more than a decade of deflation.
Abe, who led his Liberal Democratic Party to a landslide victory in December elections and made aggressive budget and monetary stimulus a centerpiece of his campaign, hailed Tuesday's action as a game-changer.
"It is 'epoch-making' in a sense of bold review of monetary policy," he told reporters.
Indeed, the government's top spokesman said he saw no need to revise a law guaranteeing the BOJ's independence, a threat that had been hanging over the central bank unless it adopted bolder monetary policy.
BOJ Governor Masaaki Shirakawa said BOJ moves to ease policy in four of the past six months had been "extraordinary", but he repeated his warning that the government must do its part to reinflate the world's number three economy, which has suffered four recessions since 2000.
"Various government measures to boost Japan's competitiveness and growth potential are equally important," Shirakawa told a news conference.
Under the BOJ's current program, it has pledged to supply 101 trillion yen by the end of 2013 by buying assets and issuing loans.
From 2014, it will switch to an open-ended commitment to buy assets, a move many analysts thought would only come later.
It will buy 13 trillion yen ($144.77 billion) in assets each month but accounting for redemptions, the total size of the program will increase by 10 trillion yen in 2014, a balance that will be maintained beyond 2014.
"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."
Often criticized for step-by-step easing, the BOJ would be emulating the U.S. Federal Reserve's open-ended asset purchases. But analysts were quick to point out that unlike the Fed, the BOJ is delaying the launch of its scheme.
The decision to adopt open-ended asset purchases was unanimous, but doubling the inflation target proved more controversial as two of the nine board members voted against the idea. They argued it was too high compared with what was deemed sustainable in Japan.
Japan has achieved 2 percent inflation in only a handful of months since the late 1990s.
The dissenters, Takehiro Sato and Takahide Kiuchi, also argued government efforts to boost Japan's growth potential must come first -- a surprise given they were among the board members most willing to try new steps in expanding stimulus.
The split, which comes ahead of a BOJ leadership change, underscores the challenges that lie ahead as the central bank attempts to revive the economy and live up to market expectations with its depleted policy arsenal.
MORE ACTION EXPECTED
Many analysts expect Abe to pressure the central bank to ease policy further, at least in the run up to an upper house election expected in July.
Options include scrapping the 0.1 percent floor the BOJ sets for short-term interest rates to try to encourage more lending and the central bank buying longer-duration bonds.
Shirakawa has ruled out abolishing the rate floor, a position he repeated on Tuesday. He argues doing so would discourage commercial banks from lending to each other and distort proper market functions.
Other board members do not share his concerns and with Shirakawa's term expiring in just over two months, markets see it as a likely next step.
"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.
In addition to the BOJ measures, the cabinet this month approved $117 billion of spending in Japan's biggest stimulus since the global financial crisis.
But many economists have warned the measures will provide only a temporary boost for Japan unless the government follows through with politically more difficult economic reforms such as deregulating its protected farming sector.
The push to reflate the economy could also backfire if Abe fails to convince markets that it has a credible plan to get Japan's ballooning debt back under control.
Seeking to address such concerns, the government said in the joint statement it would draw up a growth strategy and pursue structural reforms to help Japan escape deflation and it pledged to maintain fiscal discipline.
In a sobering reminder that Japan still faced an uphill battle in pulling out of deflation, the BOJ's updated economic forecasts showed core consumer prices, which exclude volatile fresh food prices, inching down in the current fiscal year and up only 0.9 percent in the year ending in March 2015.
"So when will they meet their inflation target of 2 percent?" asked Capurso of Commonwealth Bank of Australia.
(Additional reporting by Stanley White and Kaori Kaneko; Writing by Tomasz Janowski; Editing by Neil Fullick)