The Bank of Japan’s Very Bold Move


The U.S. Federal Reserve may have quit quantitative easing (QE), but Japan’s central bank stunned late last week by announcing more of the same. Has Bank of Japan (BOJ) Governor Haruhiko Kuroda saved Abenomics?

Highlighting the growing gap between the world’s biggest and third-biggest economies, on October 29 the Federal Open Market Committee (FOMC) announced it was winding up its asset buying program following signs of increased economic activity, including a “substantial improvement in the outlook for the labor market.”

“On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow,” the FOMC’s statement said, predicting that “economic activity will expand at a moderate pace.”

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The move to end the Fed’s six-year-long bond buying program, which peaked at $85 billion a month, follows a fall in the U.S. unemployment rate from 10 percent in October 2009 to 5.9 percent in September 2014. U.S. gross domestic product (GDP) expanded at a 3.5 percent annual rate in the September quarter, while consumer prices rose by only 1.7 percent in the year to September, well within the Fed’s 2 percent target.

Yet the U.S. central bank has not ended its easy money policy completely. It committed to maintaining the federal funds rate target at between zero and 0.25 percent “for a considerable time,” based on economic conditions.

While U.S. stocks slipped initially on the news and the dollar climbed, the benchmark S&P 500 index of U.S. shares later hit a record high on October 31 amid improved U.S. earnings and optimism over Japan’s expanded QE program.

Asian stocks including Japan’s benchmark Nikkei Stock Average also celebrated, with a regional index posting its biggest rise since April 2013 after the BOJ announced Friday it would ramp up purchases of Japanese government bonds to an annual rate of 80 trillion Japanese yen ($700 billion), up by 30 trillion yen. Japan’s central bank also said it would triple purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs), as well as buying ETFs that track the JPX-Nikkei Index 400.

Approved by a narrow five-four vote, the BOJ said its decision followed “somewhat weak developments in demand following the consumption tax hike and a substantial decline in crude oil prices…if the current downward pressure on prices remains, albeit in the short term, there is a risk that conversion of deflationary mindset, which has so far been progressing steadily, might be delayed.”

The BOJ said it would continue with its QE program “as long as it is necessary” to maintain a stable price target of 2 percent, making policy adjustments “as appropriate.”

‘Uncharted Territory’

According to the Nikkei Asian Review, the BOJ has moved into “unchartered territory” with the nation’s monetary base expected to exceed 350 trillion yen ($3.07 trillion) by the end of 2015, compared to $4 trillion in the United States. The Japanese financial daily noted that the figure represented around 70 percent of Japan’s GDP, higher than in the United States or Europe.

“The BOJ has said that it will continue quantitative easing until inflation stabilizes at 2 percent. Given that several members of its policy board predict roughly 1 percent inflation for fiscal 2016, Japan may continue with its easy-money policy for some time. At this rate, Japan’s monetary base will surpass that of the U.S. in the first half of 2017,” the Nikkei said.

Friday’s announcement also shocked market watchers, with only three of 32 economists in a Bloomberg survey forecasting an expansion of the central bank’s monetary stimulus.

In another boost to Japanese stocks, the $1.1 trillion Government Pension Investment Fund (GPIF) announced the same day it would increase buying of Japanese and overseas stocks to 25 percent each of its portfolio, up from 12 percent each, while cutting its domestic bond holdings to 35 percent from 60 percent.

The double dose saw the benchmark Nikkei stock index hit a seven-year high of 16,533, closing up 4.8 percent at 16,413. In another boost for Abenomics, the yen dropped to its lowest level since 2008 against the U.S. dollar at 110.91, with traders now predicting the yen will fall to 115 in the next three months.

Defending his board’s decision, Kuroda said: “We decided to expand the quantitative and qualitative easing to ensure the early achievement of our price target. Now is a critical moment for Japan to emerge from deflation. Today’s step shows our unwavering determination to end deflation.”

The comments by the BOJ governor would have pleased Japan Prime Minister Shinzo Abe, who backed Kuroda to overcome deflation after the failure of his more cautious predecessors.

Indicating the tough task ahead for Abe as he weighs another rise in the consumption tax rate, the BOJ halved its growth forecast for the fiscal year to March 2015 to just 0.5 percent. While it cut its estimate for growth in consumer prices, it said the 2 percent price stability target would still be reached “in or around fiscal 2015.”

“This is very significant because it reasserts Kuroda’s leadership over the policy board, which was beginning to show open dissent,” JPMorgan Securities analyst Jesper Koll told Reuters.

“It recognizes what we have known, that the real economy has been weaker than expected, weaker than forecast, and reasserts that Kuroda thinks they can do something about this.”

The seemingly concerted action by Japan’s central bank and its public investment fund won praise from Eurozone watchers, who said the European Central Bank (ECB) had failed to engineer the same level of support.

“[Japan’s actions] stand in fairly sharp contrast with Europe, where you’ve got the ECB struggling to take the QE action it would like to because of all sorts of vested interests,” National Australia Bank’s Ray Attrill told the Australian Financial Review. “They’re getting pretty short shrift from the Germans in particular…the contrast of the monetary policy machinery between Europe and Japan couldn’t be more stark.”

A lack of policy coordination may be hampering Europe’s recovery, but Kuroda has also been forced to spur growth after a sharp contraction caused by April’s hike in the consumption tax.

Will Abe help ensure the recovery continues by delaying the next hike, planned for October 2015? According to reports, the prime minister will make the crucial decision after studying economic data for the July-September quarter, which is likely to be relatively weak.

According to the New York Times’ Neil Irwin, the Japanese leader might consider discretion the better part of valor.

“…While it is nice to see boldness from one of the world’s leading central banks — a sharp contrast with the sluggishness of the European Central Bank in responding to dire threats to the eurozone economy – the move does underscore a broader problem that has haunted the global economy the last several years. Central banks have been the only players in town trying to boost global growth,” he argues.

“We’ve gotten used to central bankers with names like Kuroda, Bernanke, Yellen and Draghi being the primary actors trying to get the global economy on track. Their job would be much easier if their counterparts holding elected office showed the same enthusiasm.”

QE might have ended in the United States, but it appears far from finished in the land of the falling yen – and perhaps even the eurozone.

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