Publications
Partners
Tokyo - The Bank of Japan (BOJ) expanded its purchases of exchange-traded funds and doubled the size of a US dollar lending programme, while refraining from boosting the pace of government-bond purchases that have formed the main part of its monetary stimulus.
Governor Haruhiko Kuroda led his board in voting to expand an ETF programme to 6 trillion yen a year, the BOJ said in a statement in Tokyo Friday. In an unexpected development, Kuroda has ordered an assessment of the effectiveness of BOJ policy, to be undertaken at the next meeting, which is scheduled for September 20-21.
The central bank kept its annual target for expanding the monetary base at 80 trillion yen ($779bn), done mainly through an equivalent increase in government bond holdings. It also left untouched the minus 0.1% rate for a portion of commercial banks’ reserves. A dollar-lending programme was expanded to $24bn.
By taking some action, Kuroda, 71, offers support for Prime Minister Shinzo Abe, who two days ago unveiled a 28 trillion yen fiscal stimulus package that will now bear the main burden for stoking expectations for growth and inflation. The BOJ had come under increasing pressure from the government to make a move that dovetailed with its own package, making it tough for Kuroda and his team to leave policy entirely unchanged today.
‘Political pressure’
“They succumbed to political pressure this time,” said Takeshi Minami, an economist at Norinchukin Research Institute. “The BOJ couldn’t do anything on the negative rate because it’s unpopular. This won’t be the end of stimulus and expectations for further easing will last."
The yen climbed immediately after the announcement while the Topix stock index was down 0.5 percent at 13:48 in Tokyo. Most economists had predicted more from the BOJ, given diminishing inflation expectations and weak growth. Almost two thirds had predicted a rate cut, more than two thirds had seen an acceleration in ETF buying, and just over half predicted a stepping-up in the increase of the monetary-base.
The BOJ said there are risks to achieving its 2% inflation target within its latest time frame - sometime in the 12 months through March 2018 - and that it took action to ward off a decline in business and consumer sentiment. Risks are also rising because of the UK’s decision to exit the European Union and a slowdown in emerging-market economies, the bank said.
The limited policy action from the BOJ move underscores a perception that it is running into operational challenges as the Kuroda era of massive stimulus wears on. The former Finance Ministry currency-policy chief fired his first bazooka weeks after taking the BOJ’s helm in March 2013, and surprised investors by expanding the program in October 2014. More recently, the introduction of a negative-rate policy this January came as a shock to observers, just days after he had publicly rejected the idea.
The expansion of the dollar-lending programme to $24bn, and a new programme started to lend some of the BOJ’s bonds to financial institutions, was intended to increase access to supplies of the US currency.
The focus now shifts to Abe’s fiscal package, the outlines of which are set to be reviewed by the cabinet next week, with analysts anticipating passage in parliament in October. The BOJ said its own action today would have synergy benefits with government measures.
Much of the 28 trillion yen headline number from Abe’s plan is likely to be loans that can be spread over years. There’s about 7 trillion yen of new spending included, according to a person familiar with the matter, who didn’t specify the time frame for the outlays.
Historically, fiscal stimulus efforts on their own have failed to reverse the deflation that took hold in the 1990s, and many economists have instead advocated that the Abe administration focus on structural reforms. Little new has developed in recent months on the reform front, this so-called third arrow of Abenomics, with the focus dedicated to the fiscal discussions.
IMF view
Still, the International Monetary Fund said earlier this month that “Japan’s growth in 2017 could be higher if, as expected, a supplementary budget for fiscal year 2016 is passed, providing more fiscal support.”
The BOJ’s announcement came hours after government reports showed that the economy remained weak in June. Core consumer prices dropped for a fourth consecutive month while household spending slumped. Industrial production was a bright spot, rising more than expectations. The data also showed continuing tightness in a labour market influenced by the country’s shrinking population.
With its easing to date, the BOJ now holds more than one third of Japanese government bonds outstanding, contributing to a collapse in yields - with JGB maturities out to 15 years recently staying below 0 percent. That has flattened the so-called yield curve, eroding the spread for banks between their short-term funding costs and long-term lending rates.
The BOJ’s vacuuming up of government debt also has led to a slump in liquidity, making it more difficult to step up the current pace of JGB buying.
“A technical limit of large-scale JGB purchases is in sight,” Kiichi Murashima and Katsuhiko Aiba, Japan economists at Citigroup, wrote in a note before the BOJ’s announcement. They anticipated the central bank over time will depend more on the negative interest rate policy.
