The Bank of Japan on Tuesday stepped up its monetary easing measures, breaking with precedent to announce an explicit consumer price inflation target of 1 percent, while plowing a further ¥10 trillion into its asset purchase program.
The BOJ will continue its virtually zero interest policy until the new 1 percent target is achieved, the central bank indicated in a statement after its Policy Board meeting ended.
“For the time being, the Bank will pursue powerful monetary easing by conducing its virtually zero interest rate policy and by implementing the Asset Purchase Program . . . with the aim of achieving the goal of 1 percent in terms of the year-on-year rate of increase in the CPI (consumer price index),” the BOJ said.
The central bank’s moves come after recent signs of weakness in the domestic economy.
“There is high degree of uncertainty over the outlook for Japan’s economy,” BOJ Gov. Masaaki Shirakawa said later Tuesday.
The measures the bank adopted Tuesday are intended to support growth amid the unfavorable global economic climate, he added, hinting the BOJ could be willing to inject massive amounts of the now ¥65 trillion asset purchase program into the market to spur the economy.
The BOJ has previously declined to publicly reveal a target for the consumer price index, but lawmakers have been pushing it to follow the U.S. Federal Reserve and explicitly state a CPI target.
The central bank said that announcing a target of 1 percent “to clarify the central bank’s monetary policy stance” is intended to help reverse Japan’s long-term deflationary trend and create sustainable growth based on price stability.
Previously, the central bank has only said it would maintain its zero-interest rate policy until it identifies a sustained period of “price stability.”
Setting the 1 percent inflation target “demonstrates the BOJ’s will” and determination to revive the domestic economy, and will increase the impact of the central bank’s policies in the market, Shirakawa said.
He conceded, however, that the change at least in part resulted from listening to a variety of opinions, including those of Diet members and key economists.
During their two-day meeting, Policy Board members also decided to pump an additional ¥10 trillion into the BOJ’s asset purchase program — raising it to ¥65 trillion in total — and earmarked the new funds solely for the purchase of Japanese government bonds, the bank said.
Lawmakers have also been lobbying the bank to boost the asset purchase program and play a more active role in reining in the yen’s surge against other major currencies and reversing Japan’s chronic deflation.
The members unanimously agreed to keep the BOJ’s virtually zero-interest rate policy, it added.
In the medium to long term, the central bank defined its consumer price inflation target as “within a positive range of 2 percent or less in terms of the year-on-year rate of change in the CPI.” The target will be reviewed once a year in principle.
On the recent signs of economic weakness, the BOJ said the economy “continues to be affected by high uncertainty regarding the prospects and outcomes of the European debt problem” and other factors, including the strong yen. The central bank will do its “utmost to ensure that Europe’s crisis will not influence the stable conditions in Japan,” it added.
A government report Monday reported that gross domestic product in the October-December quarter contracted at an annualized rate of 2.3 percent, while the BOJ Policy Board had itself revised downward its economic growth forecasts for fiscal 2011 last month.
In January, the board reversed its projection of 0.3 percent growth for the year and instead forecast a contraction of 0.4 percent, citing such factors as Europe’s sovereign debt crisis and the yen’s record appreciation.
But the BOJ noted in its statement Tuesday that domestic demand has remained firm, due in part to reconstruction-related work to rebuild shattered areas in the disaster-hit northeast.
The new monetary easing steps are intended to “further support recent positive developments from the financial side and better ensure the economy’s return to a moderate recovery path,” the BOJ said.