Bank of Japan opts for extra stimulus

The Bank of Japan has taken surprisingly modest easing action, dashing hopes of a big move to kickstart growth.

Bank of Japan governor Haruhiko Kuroda, centre, at the start of today’s policy board meeting. Pic: AFP

The Bank of Japan has taken surprisingly modest easing action by increasing its stock-fund purchases, but it strongly indicated that the latest measure is a co-ordinated move with Prime Minister Shinzo Abe’s government to reactivate the economy.

The central bank said it would buy exchange-traded stock funds at an annual pace of ¥6 trillion, nearly double the previous amount, in a fresh effort to protect the economy from recent economic uncertainties stemming from the UK’s decision to leave the European Union. The board voted 7-2 in favour of the move.

The BOJ said it took the action, “to prevent these uncertainties from leading to a deterioration in business confidence and consumer sentiment,” among other goals.

The bank left its purchases of Japanese government bonds unchanged at ¥80 trillion.

It also left its deposit rate unchanged at minus 0.1 per cent in a 7-2 vote. The charge on yen deposits held by commercial banks was launched in February to spur bank activity, but has delivered limited results in terms of extra lending and has instead generated negative feelings among the public and the banking sector.

“The bank believes that these monetary policy measures and the government’s initiatives will produce synergy effects on the economy,” the central bank said in reference to the government’s coming stimulus package.

The yen surged after the Bank of Japan’s changes to its stimulus program, which disappointed dealers who had expected a big announcement to kickstart growth in the world’s number three economy.

“The market had expected more than what the BOJ announced today, which triggered some disappointment and led to the yen’s surge,” said Yosuke Hosokawa, head of the forex sales team at Sumitomo Mitsui Trust Bank. “This is showing the ceiling of what monetary policy can do.”

The additional easing is the latest element in what Mr Abe’s advisers call an “upgrade” of Abenomics, his latest attempt to end Japan’s deflation through fiscal and monetary stimulus.

Mr Abe said on Wednesday that he would announce next week a new spending package with a total value topping ¥28 trillion. In June, he pushed back a potentially growth-sapping sales tax increase to 2019.

Officials expect the combination will provide the impulse needed to jolt the economy out of stagnation and deflation.

But many economists see the upgraded Abenomics as a repeat of measures that failed to work in 2013-14.

The BOJ’s choices risk disappointing investors who expected more aggressive action to counter faltering inflation and a stronger currency. Pressure on the BOJ to expand its stimulus had been rising for months, and speculation in recent weeks about what it might do went as far as “helicopter money,” a radical policy involving direct underwriting of government spending.

Many economists, though, had already concluded that the BOJ had reached its policy limits, and had little or no ammunition left to fire. This view is likely to gain currency after the BOJ decided not to expand its JGB purchases or drive the reserve rate lower.

Bank governor Haruhiko Kuroda has vowed again and again to do “whatever it takes” to reach 2 per cent inflation. But inflation is nowhere near that level — and in recent months has been moving in the opposite direction.

“Whatever it takes.” The Bank of Japan’s Haruhiko Kuroda.

The BOJ’s move comes as other central banks struggle to address their own set of challenges. The US Federal Reserve has been trying for months to raise interest rates, but has been thwarted by uneven economic data and global uncertainty, particularly surrounding the UK’s vote to leave the European Union.

The European Central Bank last week left its policy on hold in its first meeting after the Brexit vote, with President Mario Draghi saying the central bank would reassess conditions in September.

In Japan, recent data has been downbeat. Prices fell in June at the fastest pace since 2013, while consumption was weaker than expected, according to data released earlier Friday. Politicians and central bankers blame years of sporadic price declines for economic stagnation.

Consumer prices for items excluding fresh food fell 0.5 per cent in June from a year earlier, the fourth consecutive decline, the government said.

Mr Abe took office in December 2012 vowing to end 15 years of deflation, or steadily falling prices. After some initial success, an increase in the national sales tax to 8 per cent in April 2014 from 5 per cent hit consumer spending, and growth has been patchy for the last two years.

Nonetheless, a healthy job market and political stability have helped keep Mr Abe’s popularity fairly high. His ruling coalition won elections for parliament’s upper house in July, helping the stock market rise.

Mr Abe’s latest stimulus package is aimed at keeping the momentum going. The program is likely to include greater government spending on infrastructure, including a magnetic-levitation train line connecting Tokyo and Osaka, centre of Japan’s second-most-populous region. Construction is already under way on an initial leg of that route. The stimulus plan may also include direct payments to lower-income people.

Some economists question whether such stimulus could overcome the causes of Japan’s slow long-term growth, including its falling population. “Even if Japan were to spend a trillion yen or two more a year, that trend can’t be changed,” said Yuichi Onsen, general manager of global fixed-income investment at T & D Asset Management Co.

Jobs data released today showed a tight market, with more jobs available than there are workers to fill them. That is another reason a stimulus might not have the usual effect, because construction companies say they lack the workers to undertake more projects. Japan allows only limited immigration, especially by manual labourers, so it is difficult to expand the workforce quickly to take on additional projects financed by government spending.

With Megumi Fujikawa

Dow Jones, AFP