Thursday, October 30, 2014

BOJ boosts QE to 80 trln yen to avoid deflation mindset

    Japan's central bank raised its target for boosting the country's monetary base by 10-20 trillion yen to about 80 trillion yen to prevent growing deflationary expectations from taking root.
    The Bank of Japan (BOJ), which embarked on quantitative and qualitative easing (QQE) in April 2013 by pledging to double the monetary base by buying 60-70 trillion yen of assets a year, said it would now purchase an additional 30 trillion yen worth of government bonds (JGBs) compared with the past "with a view to encouraging a decline in interest rates across the entire yield curve."
    The BOJ will also triple its purchase of exchange-traded funds so the amount outstanding rises to an annual pace of about 3 trillion yen and triple the purchase of Japanese real estate trusts (J-REITs) so the amount outstanding rises by about 90 billion yen. In addition, the BOJ will make ETFs that track the Nikkei index eligible for purchase.
    The central bank's target for purchasing commercial paper and corporate bonds will remain  about 2.2 trillion yen and about 3.2 trillion yen, respectively.
    In its statement, the BOJ said the expansion of QEE was decided by a 5-4 majority vote.
     As in its previous statement from Oct.7, the BOJ said the country's economy was continuing to "recover moderately as a trend" but today it added that the economy was expected to continue growing at a pace that was above the economy's potential.
    "However, on the price front, somewhat weak developments in demand following the consumption tax hike and a substantial decline in crude oil prices have been exerting downward pressure recently," the BOJ said.

    The BOJ has targeted inflation of 2 percent but financial markets and economists have become increasingly skeptical that the bank would achieve this goal and were expecting the BOJ to expand its asset purchases before the end of the financial year in March.
    Japan's headline inflation rate slowed to 3.2 percent in September from 3.3 percent in August but excluding the impact of the sales tax hike in April, core inflation (CPI excluding fresh food) was only 1 percent.
    The BOJ's aggressive monetary easing campaign in April 2013 was launched with the aim of ending 15 years of deflation.
    The government's increase in sales tax in April to help reduce its budget deficit has hit consumer demand but the BOJ said it was starting to bounce back and the decline in global crude prices would have a positive impact on economic activity in the long run and help push up prices.
    "Nevertheless, 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, adding:
   "To pre-empt manifestation of such risk and to maintain the improving momentum of expectation formation, the Bank judged it appropriate to expand the quantitative and qualitative easing (QQE)."


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