In an effort to rid the country of the rampant deflation that has hobbled the economy for almost twenty years, the Bank of Japan (BOJ) has unveiled plans to buy up long-term bonds in order to increase the monetary base.
Newly arrived BOJ Governor Haruhiko Kuroda said there would be a “new era of stimulus and easing” for the world’s second largest economy as they attempt to fall in with the government’s target of 2 percent inflation.
“It’s impossible to solve the issue of deflation with traditional methods,” said Mr. Kuroda. “We need to use a more direct approach.”
Should the current plan fail to bump Japan’s prices sufficiently, there is the potential for the BOJ to accelerate the strategy in the coming years, although Mr. Kuroda said that was unlikely.
“For the inflation target to be reached in the next few years the action we are taking now should be enough,” he said.
There were significant market movements after the news broke, with over a 2 percent rise in the Nikkei 225 on closing. 10-year bond yields took a nosedive to 0.447 per cent, almost a 20 percent fall, the biggest drop for a decade. The yen hit a fortnightly low, falling from 92.91 versus the greenback to 95.21.
The plan revealed the BOJ will purchase long-term bonds which will bump the average maturity of its holdings from three to seven years. This will help to keep yields low all across the spectrum. The influx of cash into the system is likely to double the overall monetary base.
According to analysts at investment and trading firm Sinolink Japan, the BOJ will need to develop its balance sheet by 2 percent of GDP month by month. In comparison, the U.S. Fed program called for a 0.5 percent of GDP balance sheet expansion.
Head finance analyst at Westpac Singapore, Jonathan Cavenagh, said the strategy was “very bold” and commented that “no-one was really expecting such drastic measures.”
The change in tactic marks a redirection in the BOJ’s asset purchasing. Its previous forays into the market have almost always been with the single minded goal of keep interest rates at rock bottom. The current plan is simply to increase the monetary base by as much as possible.
In order to double the monetary base, the BOJ would have to buy enough bonds to take the figures from 140 trillion yen to 280 trillion.
