Japan Holds Off on Further Easing

on Jul 12, 2012
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Despite the slowing global growth that has recently driven other major central banks into expanding stimulus, the Bank of Japan (BoJ) decided to hold off on further monetary easing at its Policy Board meeting on Thursday (July 12). Instead of taking action towards additional stimulus, BoJ officials underlined Japan’s commitment to charting a path of moderate recovery and even predicted 2.2 per cent economic growth for the current year.

“While there are many instances when the policies of many nations end up in the same direction, we will not mechanically link our policy (to such moves),” BoJ Governor Masaaki Shirakawa said at a news conference after the meeting.
The Bank of Japan also announced that it will steadily increase the size of its asset-purchase programme which is made of two pools of funds. The amount used to purchase short-term government bonds with maturities of less than one year from financial institutions was increased by 5 trillion yen (£40.5 billion) to 9.5 trillion yen (£76.9 billion), while 5 trillion yen was cut from the fixed-rate loans. Overall, that meant no change in the funds being pumped into the market.

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!m[](/uploads/story/136/thumbs/pic_1_inline.png)“As for the outlook, Japan’s economy is expected to return to a moderate recovery path as domestic demand remains firm and overseas economies emerge from the deceleration phase,” BoJ said. As Japan refused to join the global trend towards additional monetary stimulus, the world’s third largest economy chose the path towards gradual recovery, eyeing 2.2 per cent growth for the current fiscal year ending March 31, 2013. This outlook is slightly lower than the 2.3 per cent expansion forecasted in April, but still amongst the highest of developed economies. Due to lower commodity prices, BoJ’s median estimates of core inflation were also revised down to 0.2 per cent from the April forecast of 0.3 per cent. At the same time core inflation and domestic gross product growth estimates for the next financial year were left unchanged at 0.7 per cent and 1.7 per cent, respectively.

The potential of Japan’s economic growth has already affected the financial markets. The BoJ’s Tankan survey this month showed improved business confidence and more ambitious plans for capital investment. BoJ’s announcement that Japan will hold off on additional monetary easing pushed the yen 0.5 per cent higher against the forex index. Meanwhile equities fell, with the benchmark Nikkei 225 average closing down almost 1.5 per cent, while the bond markets yields edged down by about two basis points along the curve. Key to that reception was the central bank’s decision to scrap the minimum 0.1 per cent bidding yield for its purchases of Treasury Bills. T-bill yields have often dipped below that level as foreign investors have sought refuge from Eurozone uncertainty in yen assets. According to analysts, now Japan could theoretically go a step further, emulating the European Central Bank (ECB) in cutting its overnight deposit rate to zero.

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