Bank of Japan acts to spur growth

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The Bank of Japan has eased monetary policy by signalling increased purchases of Japanese government bonds, in a move that appears mainly aimed at responding to political pressure.

In an unexpected announcement, the bank said it would expand its asset-purchasing programme – the main policy tool given interest rates are near zero – to Y65tn ($832bn) from Y55tn.

The Japanese economy has struggled to adjust to the effects of the earthquake and tsunami last March, the flooding in Thailand and a persistently strong yen. Real gross domestic product fell 0.9 per cent in 2011, from a 4.5 per cent rise in 2010.

The central bank also modified its stance on inflation by vowing to hit a “goal” of 1 per cent year-on-year change in the consumer price index “for the time being”. Previously, it aimed to achieve a change of “around” 1 per cent over a looser time frame.

Japan has experienced more than 15 years of falling prices, with only brief interruptions. Yet the BoJ has been reluctant to set a firm target for inflation on the understanding that once such a target was set, policymakers would feel bound by it, resulting in the loss of policy flexibility.

Tuesday’s measures came after opposition politicians had urged additional stimulus, claiming that moves by other central banks showed the BoJ was not doing enough to counter deflation.

Last month, the US Federal Reserve pledged to keep interest rates near zero until 2014 and signalled another round of asset purchases, while the European Central Bank and Bank of England have aggressively expanded their balance sheets.

In Japan, ultra-low interest rates have consistently failed to stir demand for credit. Companies have been more concerned about paying down debt than taking on more of it, while households have shrunk from debt-fuelled consumption, fearing falling wages.

Analysts said the increase in Japanese government bond purchases was the more significant of Tuesday’s measures, as it should help ease fears over fiscal sustainability amid weak corporate tax receipts.

To meet its target, the BoJ will have to increase its monthly purchases of bonds by Y1.4tn, from the current monthly level of Y1.8tn, noted analysts at Société Générale.

Further, by targeting bonds due within two years, the BoJ should bring down real yields, discouraging speculative flows of external capital that have pushed up the yen, hurting exports. By 10pm in Tokyo the yen had dropped to 78.14 to the dollar, 0.7 per cent weaker on the day.

Some analysts said the measure on price stability was a response to a recent call from Motohisa Furukawa, the new economy minister, that the BoJ should improve the communication of its stance on prices.

The US Fed has clearly adopted a formal inflation objective of 2 per cent, binding the bank to a defined goal that will endure after chairman Ben Bernanke leaves.

After the BoJ decision, Jun Azumi, finance minister, said the bank had “effectively set an inflation target”. But analysts pointed out that the BoJ had avoided using the term for “target” in Japanese.

“This is more a linguistic change than a monetary policy change,” said Kyohei Morita, economist at Barclays Capital. “Politically, this meant something, but economically it meant nothing.”

Analysts speculated that the BoJ had acted following threats to revive legislation to strip away its independence.

Under governor Masaaki Shirakawa, appointed in April 2008, the bank has never eased policy while simultaneously upgrading its economic outlook, as it did on Tuesday. The BoJ said that “domestic demand has been firm due in part to reconstruction-related demand.”

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