Monetary base soars to highest ever: BOJ

Kyodo

The nation’s monetary base jumped 23.1 percent in April from a year earlier to ¥149.60 trillion, setting new record highs for two months in a row as the Bank of Japan aggressively eases to fight deflation.

The central bank said Thursday that the average daily balance of liquidity it provided — consisting of cash in circulation and the balance of current account deposits held by commercial financial institutions at the BOJ — expanded for the 12th consecutive month.

Japan’s monetary base at the end of April stood at ¥155.28 trillion, the highest on record, it said.

The balance of current account deposits, or the sum of funds the institutions can use freely, expanded 70.6 percent to ¥61.94 trillion, with the BOJ injecting more liquidity into the banking system by buying a large amounts of financial assets from commercial banks.

The BOJ said April 4 that it made Japan’s monetary base its main target for its monetary policy operations instead of the overnight call rate, to clarify its policy of pursuing “quantitative and qualitative monetary easing,” an unorthodox plan launched to end deflation.

The central bank said that it will double the monetary base within two years by increasing its purchases from an annual pace of about ¥60 trillion to ¥70 trillion so it can put an end to nearly two decades of slumping prices and anemic economic growth.

The monetary base is projected to rise to ¥200 trillion at the end of this year and to ¥270 trillion at the end of next year if the central bank conducts its operations as planned.

Under the new leadership of Gov. Haruhiko Kuroda, the BOJ last month launched a set of new quantitative easing steps, including additional purchases of government bonds and risky financial assets, such as exchange-traded funds and real estate investment trusts.

The bank has pledged to achieve its 2 percent inflation target within two years, arguing that deflation is a “monetary phenomenon.”

Impact needed: minutes

Bank of Japan policymakers agreed during their April 3 to 4 policy meeting that the central bank needed to enter “a new phase of monetary easing,” with some of its members calling for steps that would have an impact on financial markets, the minutes of the meeting said Thursday.

“Some members expressed the view that it was important for the bank to introduce a policy that would have an impact in terms of scale, so that the markets would perceive that it had decided to take all necessary measures” to attain the 2 percent inflation target, the minutes said.

At its first policy meeting chaired by Gov. Haruhiko Kuroda, the BOJ decided to double the monetary base in two years, adopting it as the main target for money market operations instead of the overnight call rate.

Many members agreed it was necessary to reconsider the overall framework of the monetary easing policy conducted by previous Gov. Masaaki Shirakawa, noting there “appeared to have been limitations with regard to policy effects it could further pursue.”

Recognizing the need for the central bank to “enter a new phase of monetary easing both in terms of quantity and quality,” the members agreed to stop adopting measures incrementally, the minutes said.

The members also concurred on the importance of the bank communicating to the public “in a clear and intelligible manner,” with one member saying its policy framework had been complicated and difficult to understand and its communication to the public was “not necessarily effective,” undermining policy effects.

Meanwhile, some members pointed out possible side effects of the drastic easing policy, such as restrained returns on investment of institutional investors, notably life insurance companies and pension funds, as well as a rise in speculation that the BOJ was engaged in financing the government’s debt, a moral hazard waiting to happen.