Bank of Japan Governor Haruhiko Kuroda played down concerns his unprecedented burst of monetary stimulus would create asset-price bubbles even as it delivered an immediate pay-off in global markets, with government bond yields at a record low, the yen hitting a 3-1/2 year trough and stocks surging to multi-year highs.
The yen weakened past 97 per dollar on Friday for the first time since August 2009, a day after the BOJ vowed to inject about $1.4 trillion into the economy in less than two years in a dose of shock therapy to end two decades of deflation.
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The Nikkei share average jumped as much as 4.7 percent, extending Thursday's 2.2 percent rise and breaking through 13,000 points for the first time since August 2008. The 10-year JGB yield fell as much as 12 basis points to a record low of 0.315 percent.
"We will be vigilant of the risk of a bubble. I don't think there's a bond or stock market bubble now and I don't see one emerging any time soon. But we will be vigilant of the risk," Kuroda told the lower house of parliament.
The BOJ's strategy to reach 2 percent inflation within two years was viewed as a radical gamble to revive the economy. It will buy about 7 trillion yen ($73 billion) of bonds per month, equivalent to about 1.4 percent of gross domestic product. By comparison, the U.S. Federal Reserve is buying $85 billion of bonds per month, about 0.6 percent the size of the economy.
The central bank will also increase purchases of exchange-traded funds by 1 trillion yen per year and real-estate trust funds by 30 billion yen per year.
"We think there is a risk of a bubble," said Hiroshi Shiraishi, senior economist at BNP Paribas Securities.
"If these types of asset purchases are going to work, then they work by distorting asset markets."
A falling yen risks upsetting other Asian exporters who may lose competitiveness, and leave Japan open to accusations it is covertly devaluing the currency. Emerging economies will also be concerned about the potential flood of inflows as investors borrow cheaply in yen and then invest elsewhere, as they have done with the U.S. Federal Reserve's quantitative easing.
The Fed and the Bank of England have also embraced large-scale bond purchases in an effort to boost growth, while the European Central Bank said on Thursday it would keep policy loose for as long as necessary to revive the struggling euro zone economy.
"Like other central banks, the BOJ will carefully watch asset price moves, job and wage conditions and other data in striving to achieve price stability," Kuroda said in testimony that was effectively a re-application for his job.
Kuroda's predecessor, Masaaki Shirakawa, was not due to step down until April 8, but decided to leave office in mid-March so the government could appoint a new governor and two deputies at the same time. A procedural quirk meant Kuroda was initially only appointed for the remainder of the Shirakawa's term, and now needs to be voted in again for a full five-year term.
The overhaul of monetary policy means the BOJ's monthly government debt purchases will total about 70 percent of new debt issued by the government. Purchases of this scale will do a lot to keep yields low, but it also raises concerns that the BOJ has basically agreed to bankroll fiscal spending.
At more than twice the size of its $5 trillion economy, Japan's public debt burden is already the worst among major economies. Politicians regularly talk about fiscal discipline, but have made little progress in trimming debt.
Moody's Investors Service said on Friday that while the Japanese government's borrowing costs are likely to remain very low over the next two years, there are concerns about whether domestic savings can finance future government debt.
When the BOJ announced its 2 percent inflation target in January, the government agreed to take steps to ensure sound fiscal policy. But so far, the government has been coy on the specific steps it will take to reign in debt.
"Based on the joint statement, the finance ministry must proceed with firm fiscal plans so as not to damage our relationship with the BOJ," Finance Minister Taro Aso said on Friday.
(Additional reporting by Dominic Lau and Tetsushi Kajimoto; Editing by John Mair)