TOKYO — The Bank of Japan set an ambitious 2 percent inflation target and pledged to ease monetary policy “decisively” by introducing open-ended asset purchases, following intense pressure from the country’s audacious new prime minister, Shinzo Abe, who has made beating deflation a national priority.
In a joint statement Tuesday with the government, the central bank said it was doubling its inflation target to 2 percent and said it would “pursue monetary easing and aim to achieve this target at the earliest possible time.”
The Bank of Japan also said that it intended to purchase assets indefinitely, promising to stick to a program that has allowed the bank to pump funds into the Japanese economy, even with interest rates at virtually zero. The bank’s board voted to keep its benchmark rate at a range of zero to 0.1 percent.
Mr. Abe immediately hailed the bank’s moves, telling the Bank of Japan governor, Masaaki Shirakawa, that the measures were “groundbreaking,” according to Kyodo News. Analysts, however, said the details of the bank’s policy were less impressive than the headlines and said they had expected more.
The central bank, for example, will only begin its open-ended asset purchases in 2014, and estimates that its asset purchase fund will increase by just 10 trillion yen in 2014, remaining unchanged after that. With such a paltry increase, it was unlikely Japan would achieve 2 percent inflation, analysts said. The consumer price index for 2012 fell 0.5 percent, according to government statistics.
The Bank of Japan’s announcement “will likely disappoint those who expected the policy board to answer Abe’s call for a ‘different kind of B.O.J. policy,’ or significantly ramp up its pace of easing,” Izumi Devalier, an economist with HSBC, said in a note to clients.
“This means pressure will remain in place for the B.O.J. to ease policy further, as the 2 percent inflation target remains ever out of reach,” Ms. Devalier and her colleagues said.
Masaaki Kanno, Japan economist for JPMorgan, also called the details of the asset purchase program disappointing. “That said, this is not the end of the game,” he said. “We should expect further easing” including an increase in asset purchases as well as purchases of longer-term assets, once Gov. Shirakawa’s term is up in April and a successor is appointed, Mr. Kanno said.
Since last year, when Mr. Abe was still opposition leader, he has urged the central bank to do more to end deflation, the all-around fall in prices, profit and incomes that has plagued Japan’s economy since the late 1990s. He stepped up the pressure on the bank after a landslide victory by his Liberal Democratic Party in parliamentary elections in December, which catapulted him to office for the second time since a short-lived stint in 2006-07.
Mr. Abe’s call for the Bank of Japan to increase the monetary supply, among other things, has weakened the yen, a boon to the competitiveness of exporters, which make up much of Japan’s growth. Earlier this month, Mr. Abe also announced a 12 trillion yen emergency stimulus, providing even more tailwind for the Japanese economy. That bright outlook has pushed the Nikkei stock index 20 percent higher since mid-November, when Mr. Abe first campaigned on his expansionary platform.
Mr. Abe’s critics, however, warn that the central bank, which will buy up more government bonds as part of its asset purchase program, will become a printing press for profligate government spending — spending that carries great risks for a country whose public debt is already twice the size of its economy. Critics also say that before flooding a broken system with money, Japan must first tackle structural problems that hurt economic efficiency.
Mr. Abe maintains that deflation will undermine any efforts to grow, and that the government and central bank must act together to get prices rising again. But in a nod to critics, the joint statement said the government would also promote “all possible decisive policy actions for reforming the economic structure” and establish “a sustainable fiscal structure.”
“I believe we are firmly on the path toward bold monetary easing,” Mr. Abe told reporters following the bank’s announcement.
Mr. Shirakawa, who has long argued that the bank alone cannot spark inflation or economic growth, called on the government to do its part to bolster the Japanese economy.
“Various actors need to put in considerable effort along with the Bank of Japan,” Mr. Shirakawa told a press conference late Tuesday. “Those efforts are going to have to be quite drastic,” he said.
Market reaction was mixed. The Nikkei index average rose 0.8 percent in anticipation of the bank’s announcement, before giving up its gains to end 0.4 percent lower, at 10,709.93. The index has risen over 20 percent, however, since Mr. Abe started his monetarist push. The dollar briefly rose above 90 yen, near the 2-year high of 90.25 it hit on Monday, but had slipped to 88.67 yen late afternoon in Tokyo.
Yields on 10-year Japanese government bonds were largely unchanged, with a benchmark issue ending trading at 0.730 percent, down 0.005 percentage points from Monday’s close.
Bank of Japan Moves to Fight Deflation
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Bank of Japan Moves to Fight Deflation
