Bank of Japan plays for time with weak stimulus

Yen soars as central bank leaves policy largely unchanged

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The Bank of Japan said it would double its annual purchases of equity funds to ¥6tn as it launched a modest additional stimulus that disappointed markets and sent the yen soaring to ¥103.5 against the dollar.

The central bank kept overall asset purchases unchanged at ¥80tn ($762bn) a year and held interest rates at minus 0.1 per cent.

But in a signal that further action is possible at its next meeting in September, Haruhiko Kuroda, the governor, ordered a “comprehensive assessment” of the economy and the effectiveness of BoJ policy.

The BoJ’s decision suggests it is concerned about sliding inflation but wants to play for time, letting Shinzo Abe, the prime minister, launch a new fiscal stimulus — likely to amount to ¥5tn-¥8tn — before taking any big monetary decisions.

Increasing purchases of exchange-traded equity funds from ¥3.3tn to ¥6tn a year is likely to boost the stock market and will be welcome news politically for Mr Abe. The Topix stock index rose 1.2 per cent to 1,322.8 in the wake of the BoJ action.

The BoJ also said it would double the size of a dollar lending facility to $24bn to help Japanese businesses overseas. Japanese companies have been suffering from the high costs of swapping yen into dollars.

“Negative interest rates and asset purchases have in no way reached a limit,” said Mr Kuroda, arguing that Japan’s problem at the moment was international uncertainty linked to Brexit and a slowdown in emerging economies.

“To stop that uncertainty hitting business and consumer confidence . . . we’re almost doubling our purchases of exchange traded funds,” he said. “That is the most appropriate and effective policy at the present time.

But the lack of a broader easing disappointed markets that were hoping for co-ordinated fiscal and monetary stimulus, or even radical measures such as “helicopter money” — a policy analogous to dropping cash out of helicopters.

“The BoJ clearly disappointed the market today with neither an increase in the amount of Japanese government bonds to be bought or a further cut in the policy rate,” said Michael Moen, a portfolio manager at Aberdeen Asset Management in Singapore.

“The measures announced today to increase ETF purchases and to increase the USD lending programme will not have a material impact on the inflationary outlook,” he said.

The BoJ cut its forecast for inflation in the year to March 2017 from 0.5 per cent to 0.1 per cent but kept its forecast for the following year unchanged at 1.7 per cent.

The decision to keep policy on hold came after new data showing Japan is still mired in deflation, with prices down 0.4 per cent on a year ago in June.

There were signs of inflationary pressure weakening further, with the so-called core-core consumer price index, which excludes food and energy, up 0.4 per cent compared with 0.6 per cent a month earlier.

But the data do not suggest any fundamental change in Japan’s economic outlook. The economy has been stuck in a pattern of mediocre growth for the past two years, after a consumption tax rise hit domestic demand and as weakness in emerging markets such as China hurts exports.

Inflation is weak because of declining commodity prices, the recent strength of the yen and sluggish consumer spending. June’s figures showed consumption remained weak, with real household spending down 2.2 per cent from a year ago, lower than analyst forecasts.

In the meantime, Japan’s labour market is getting tighter. Data on Friday showed the unemployment rate at its lowest since 1995, at 3.1 per cent.

The ratio of job openings to applicants rose 0.01 points to 1.37 — the highest level in a quarter of a century. Eventually, shortages of workers should push up wages, leading to a rise in overall prices.

In 2013, Mr Kuroda vowed to get inflation to 2 per cent within two years but he has repeatedly been forced to push back the timeframe. The central bank’s biggest concern now is to maintain the credibility of its goal and demonstrate it has the ability to ease monetary policy further.

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