Bank of Japan Shock and Awe

April 4, 2013

The Policy Board, restocked with a dovish governor and two dovish deputy governors, have walked the talk, implementing every stimulus that had been rumored and more.  My only criticisms that policymakers did not set an intermediate inflation target of 3% or even 4% inflation and that they did not redefine the inflation target to a core measure that excludes energy as well as seasonal food, that is the components that are sensitive to changes in domestic monetary policy.  It might have been useful to include a guide for yen depreciation, which could have been done indirectly by estimating their notion of the currency’s present degree of overvaluation.  If aggressive quantitative easing is to work within two years, present deflationary expectations need to be obliterated, and one does that by assigning a rate of inflation for 2014 that actually exceeds the accepted notion of long-term price stability.

The Board met over two days for a total of seven hours and nine minutes.  A statement was then released that

  • Retained a 0-0.1% overnight money target but replaced such with the monetary base as the operational target for BOJ money market operations.
  • Set a goal of doubling the monetary base over the coming two years. 
  • Set a goal of increasing the size of the BOJ balance sheet from JPY 158 trillion at end-2012 to JPY 220 trillion at end-2013 and JPY 290 trillion at end-2014.
  • Promised open-ended quantitative easing starting now and not ending until the 2% inflation notion of price stability has been reached, maintained, and seeming secured for the future in a stable manner.
  • Roughly doubled monthly purchases of JGBs to over JPY 7 trillion per month.
  • Increased the maturity of assets to be bought.  A 3-year limit had existed, but the average maturity of the BOJ balance sheet is reach seven years by end-2014.  Bonds with a maturity of 40 years will even be bought.
  • Suspended the banknote principle, in effect since March 2001, at least temporarily.
  • Extended  for another year the funds-supplying facility that supports financial institutions hurt by the Sendai earthquake.
  • Provides for enhanced dialogue with market participants with whom the central bank conducts money market operations.

Takahide Kiuchi, a holdover hawk from the old policy board, dissented from the decision.  He wanted to add language that would have given policymakers wiggle room to stop this policy short of achieving the inflation goal if it is determined that such is causing more harm than good.

A second BOJ policy meeting late in April will see the release of new macroeconomic forecast.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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