With the US Federal Reserve announcing a new round of quantitative easing, and the European Central Bank (ECB) introducing its revamped bond-buying programme, it is hardly surprising that the Bank of Japan (BOJ) also enhanced its monetary easing with the purpose of stimulating growth and countering deflation.
More precisely, on 19 September 2012, Japan’s central bank announced that it would increase the size of its asset-buying programme, as reported by the Financial Times. The programme, with which the bank buys mainly government debt, is BOJ’s key policy tool, considering that interest rates are already close to zero. As noted in the BOJ’s press release, the bank decided to increase the total size of the programme by approximately Y10 trillion (£78 billion), from about Y70 trillion to about Y80 trillion. Approximately Y5 trillion will be spent on additional purchases of treasury discount bills (T-Bills), whereas the remaining Y5 trillion will be used for purchasing Japanese government bonds (JGBs). The BOJ also pushed back the deadline for completing the purchases in question, from June 2013, to the end of 2013 and kept the benchmark interest rate between zero and 0.1 percent.
Markets reacted immediately to the BOJ announcement, with Bloomberg reporting that the Nikkei 225 Stock Average closed at its highest level since May, whereas the yen unsurprisingly weakened.
!m(/uploads/story/427/thumbs/pic1_inline.png)The FT quoted Japan’s finance minster Jun Azumi, who noted that the BOJ took more action than anticipated, adding that the move was timely considering the signs of slowing growth in the country. The BOJ noted in its press release that while the Japanese economy “registered relatively high growth in the first half of 2012”, economic growth had “come to a pause”, with overseas economies moving “somewhat deeper into a deceleration phase.”
The BOJ’s monetary easing is also an anticipated reaction to the stimulus measures recently introduced by the ECB and particularly by the Fed, whose announcement about a third QE round quickly sent the yen to a seven-month high against the greenback. This in turn fuelled fears that the yen would appreciate to levels which would threaten Japan’s exports. “We are concerned about an increase in the speed of yen appreciation, and our sense of crisis is intensifying,” said Akio Toyoda, CEO of Toyota (NYSE:TM, TYO:7203) and chairman of the Automobile Manufacturers Association, as quoted by Bloomberg.
“Whether central banks intend it or not, there is a competition for loosening monetary policy around the world,” notes Izuro Kato, chief market economist at Totan Research Co., as quoted by Bloomberg. The FT in turn reports that Junko Nishioka, chief economist at RBS Securities, pointed out that the main message from the BOJ policy decision was that Japan’s central bank was “following the global trend set by the Fed and ECB”. She, however, also noted that pushing back the deadline for completing asset purchasing by six months could prove to be insufficient for fundamentally weakening the yen, since the Fed has committed to maintaining zero rate policy until the 2015. “The market will continue to call for the BOJ to take bold action”, she added, as quoted by the FT.
In addition to the unwanted yen appreciation which reduces Japan’s competitiveness, the country’s exports are also threatened by the territorial dispute with China, which is Japan’s biggest export market. Bloomberg reports that Toyota Motor Corp., Honda Motor Co. (NYSE:HMC, TYO:7267) and Nissan Motor Co. (PINK:NSANY, TYO:7201), halted production at some plants in China while Panasonic Corp. (NYSE:PC, TYO:6752) reported damage to a factory. China has already signalled that the spat with Japan over the Senkaku islands in the East China Sea will hurt trade relations between the two countries.