The Bank of Japan on Tuesday announced a major change in its policy stance, adopting a target to achieve a 2% increase in consumer prices and saying it will now conduct asset purchases on an “open-ended” basis to boost its monetary stimulus.
Both decisions had been widely flagged and followed intense pressure from the recently elected administration of Prime Minister Shinzo Abe for the central bank to act more aggressively to spur growth and end an era of falling prices.
At the conclusion of its two-day policy meeting Tuesday, the central bank said its “price stability target” of a 2% year-on-year increase in consumer prices will replace its previous “goal” of a 1% increase in inflation.
“Under the price stability target … the bank will pursue monetary easing and aim to achieve this target at the earliest possible time,” the central bank said in a statement.
Seven of the nine members on the bank’s rate-setting board voted in favor of the 2% price stability target, but the decision on open-ended asset purchases was unanimous.
“Taking into consideration that it will take considerable time before the effects of monetary policy permeate the economy, the bank will ascertain whether there is any significant risk to the sustainability of economic growth, including from the accumulation of financial imbalances,” the central bank said in a statement.
The central bank said it will pursue “aggressive monetary easing” aimed at achieving its 2% price stability target “through a virtually zero interest-rate policy and purchases of financial assets” for as long as the bank deems it appropriate.
The open-ended asset purchase program would take effect from January 2014, once the current program ends, the central bank said.
The Bank of Japan had said after a policy meeting last month that it would increase the size of its asset purchases to 101 trillion yen ($1.14 trillion) by the end of this year, from about ¥65 trillion at the end of 2012. The central bank didn’t announce any additional monetary stimulus for 2013.
Market reaction
Japanese stocks and the dollar-yen pair turned volatile after the central bank’s decision as investors locked in profits following solid gains in recent weeks.
The U.S. dollar jumped as high as ¥90.12 soon after the Bank of Japan statement was issued, but soon tumbled to fetch ¥89.17 in Tokyo afternoon trade.
The Nikkei Stock Average charted a similarly volatile course, ending down 0.4% at 10,709.93 after swinging between sizeable gains and losses both before and after the Bank of Japan decision.
“Even if today’s meeting only meets expectation, it is hard to ignore the ground-breaking policy steps underway at the Bank of Japan,” Royal Bank of Scotland forex strategist Greg Gibbs said following the policy decision.
“While enthusiasm for further falls in [yen] at this time have waned, the fall to date won’t be sufficient to return Japan to its desired inflation path. After a few months around current levels, it wouldn’t surprise us to see more comments that encourage further [yen] declines,” he said.
Government, central bank hold hands
Meanwhile, The Bank of Japan and the government on Tuesday also released a joint statement with the government on an action plan to overcome deflation and achieve sustainable economic growth.
While the central bank will pursue a more aggressive monetary policy as outlined Tuesday, the government will work to “revitalize Japan’s economy” by flexibly managing macroeconomic policy and launching other measures to boost the country’s economic competitiveness.
The government’s measures will include reforming the economic structure, as well as “carrying out bold, regulatory and institutional reforms,” and a better utilization of the tax system, the joint statement said.
“In addition, in strengthening coordination between the government and the Bank of Japan, the government will steadily promote measures aimed at establishing a sustainable fiscal structure with a view to ensuring the credibility of fiscal management,” it said.
Marketwatch
