Bank of Japan Expands Quantitative Easing

April 27, 2012

After a one-day meeting lasting three hours and 42 minutes, the Bank of Japan announced a smaller net 5.0 trillion yen expansion of its Asset Purchase Program than many analysts had expected and hoped to see.  Compositional changes also were unveiled that will lengthen the maturity of the asset portfolio and put additional downward pressure on long-term interest rates.  The 10-year JGB slid another two basis points to 0.90%, levels last seen on a sustainable basis in 3Q03. 

Although planned JGB purchases were increased by 10 trillion yen (about $125 billion), half of that amount will be sterilized by a cut in fixed-rate funds-supplying operations against pooled collateral, and this offset will be done during the current calendar year.  Thus the total planned size of the APP at the end of December 2012 of “about 65 trillion yen” remains unchanged as a result of today’s action.  What does change after today’s decision is that by mid-2013, the program’s size expands an additional 5 trillion yen to “about JPY 70 trillion.” 

The overnight uncolateralized money rate target remains zero to 0.1%, or “virtual ZIRP” to using the central banking acronym.  Today’s votes were decided unanimously, 7-0.

The Bank of Japan released two documents: the normal statement that follows every policy meeting whether or not any changes are made and a semi-annual Outlook for Economic Activity and Prices, which unveiled new macro economic forecasts.  The forecasts are presented as both point and range projections.  The evolution of the point forecasts since July of 2010 is documented below.  Real GDP in both fiscal 2012 ending March 2013 and fiscal 2013 has been revised slightly upward, and in both periods growth far exceeds what bank officials now consider to be Japan’s maximum growth rate that doesn’t exert upward pressure on core CPI inflation.  Amazingly, they project potential GDP at merely 0.5%, which is almost tantamount to saying that Japan needs a recession to prevent a rise of inflation.  Indeed, prior to 1990, officials routinely considered growth of less than 3.0% to constitute a recession. 

Core inflation is projected to rise 0.5% this fiscal year, 0.7% in fiscal 2013, and to reach the current 1.0% price stability goal not long after that.  Mention is made frequently in both released reports that the Bank of Japan is “pursing powerful monetary easing.”  The backdrop to today’s easing and similar moves previously like in February of this year has been intensifying pressure from government officials for greater monetary relief.  More was done in February than today, so the complaining is apt to continue.

The simplest way to judge the extent of monetary stimulus is provided by the yen.  Until the second half of last year, the yen had never been stronger than 79.85, a level touched briefly in April 1995.  It is currently less than a yen from that benchmark.  A central bank willing to subordinate the idol of price stability to weakening its currency has no excuse for failure.  If the BOJ wanted to impose an 85-90 per dollar range, it could, and critical government officials know that.

  07/10 10/10 01/11 04/11 07/11 10/11 01/12 04/12
FY11 +1.9% +1.8% +1.6% +0.6% +0.4% +0.3% -0.4% -0.2%
FY12   +2.1% +2.0% +2.9% +2.9% +2.2% +2.0% +2.3%
FY13           +1.5% +1.6% +1.7%
Core CPI                
FY11 +0.1% +0.1% +0.3% +0.7% +0.7% 0.0% -0.1% 0.0%
FY12   +0.6% +0.6% +0.7% +0.7% 0.1% 0.1% +0.3%
FY13           +0.5% 0.5% +0.7%

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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