The Bank of Japan (BOJ) shocked markets on Thursday with a radical overhaul of its policy-making, adopting a new balance sheet target and pledging to double its government bond holdings in two years as it seeks to end nearly two decades of deflation.
At new Governor Haruhiko Kuroda’s first policy-setting meeting, the central bank shifted its monetary policy target to the monetary base from the overnight call rate, which is set at a range of zero to 0.1 per cent.
The unexpected scope of the changes Kuroda pushed through drove the yen lower and knocked the 10-year bond yield to its lowest in a decade.
“The BOJ will conduct money-market operations so that the monetary base will increase at an annual pace of about 60 trillion yen to 70 trillion yen,” the central bank said in a statement announcing the decision.
It also combined two bond-buying schemes, its asset-buying and lending programme and the “rinban” bond-buying market operation, to buy government bonds across the yield curve including those with duration of 40 years.
The BOJ will revert to open-ended asset purchases and buy over 7 trillion yen of long-term government bonds per month, so that the balance of its bond holdings increase at an annual pace of 50 trillion yen, the central bank said.
The central bank will also increase purchases of exchange-traded funds (ETF) by 1 trillion yen per year and real-estate trust funds (REIT) by 30 billion yen per year.
The decisions were made by a unanimous vote, marking the start of Kuroda’s drive toward aggressive monetary easing to achieve the new 2 per cent inflation target.
Japanese government bond futures soared and the benchmark 10-year bond yield hit its lowest since June 2003, slipping below 0.5 percent. The yen, which has been creeping up in the run-up to the meeting, reversed its gains, falling to 94.14 per dollar from around 92.90 before the decision, while the benchmark Nikkei stock index erased early losses.
The policy meeting was the first chaired by Kuroda since he took office on March 20, and he has been keen to engineer a “regime change” from his predecessor’s cautious approach.
It was seen as a big test of his ability to steer the central bank towards unorthodox measures to meet the 2 per cent inflation target, which was adopted in January as Prime Minister Shinzo Abe pushed for action to reflate the economy.
Kuroda has pledged to do “whatever it takes” to achieve the new inflation target in two years, a timeframe many see as overly ambitious.
He had said he wanted to combine the two separate programmes for buying bonds to both clarify how much the central bank was expanding its balance sheet and make it easier to buy longer-dated bonds.
Investors had doubted whether Kuroda had enough time to build a consensus on the board ahead of his first meeting, as some members were hesitant about loading up the BOJ’s balance sheet with too much long-term debt.
Some analysts also doubt whether printing more money is the solution. Base money, or cash and reserves at the BOJ, already hit a record in March, but the huge pile of money has failed to end deflation or boost wages.
Abe said on Tuesday he was not necessarily asking the BOJ to achieve the target “at all costs”, as some factors influencing prices, such as global economic developments, were beyond its control.
Copyright: Thomson Reuters 2013
Source : NDTV