Friday, April 5, 2013

BoJ launches aggressive offensive against deflation

The Bank of Japan has taken aggressive steps towards ending decades of deflation in Japan.   This follows the appointment of Haruhiko Kuroda as Governor of the Bank of Japan and the recent adoption of a 2% inflation target.  Kuroda had previously been critical of the lack of boldness by the BoJ in ending deflation.

 The key decisions are as follows:

1)  The primary target for money market operations changes from the overnight interest rate to the monetary base.  Open market operations will be conducted to double the monetary base from ¥138 trillion at the end of 2012 to ¥270 trillion by the end of 2014.

2)  The asset purchase program will be merged with the program of outright purchases of Japanese Government Bonds (JGBs).  Monthly purchases of JGBs will nearly double from around ¥4 trillion to ¥7 trillion.  That will take the size of the BoJ balance sheet from ¥158 trillion at the end of 2012 to around ¥290 trillion at the end of 2014.

3)  JGB purchases will now include all maturities.  Previously purchased were concentrated at the short end of the curve. 

4)  The rule that limits holdings of JGBs to the amount of banknotes in circulation has been temporarily suspended.

5)  Purchases of risk assets will also be increased by ¥1 trillion per month for ETFs and ¥30 billion for REITs. 

These are unambiguously bold steps, but bold steps are necessary.  As speculation grew about more aggressive action from the BoJ accusations began to a fly around a stepping-up of currency wars.  We disagree with that.  An end to deflation and a move to more robust sustainable growth is the best thing Japan can do for itself and the global economy.  But that isn’t going to be easy.  As I’ve said many times before in support of bold action from other central banks to avoid deflation: it’s much harder to get out of it once you’re in it.  These actions are an important part of doing just that.