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BOJ adjustments signal limits to monetary easing



The policy adjustments announced by the Bank of Japan on Friday may indicate there are limits to the drastic monetary easing policy the central bank launched to stoke 2 percent inflation.

The moves to increase the BOJ’s purchases of exchange-traded funds and broaden the average maturity of its Japanese government bond holdings appear aimed at providing additional support for Prime Minister Shinzo Abe’s ongoing efforts to increase wages and capital investment and restructure the economy.

Under the new program, the BOJ will purchase ETFs composed of stocks issued by companies that are “proactively making investment in physical and human capital.”

BOJ Gov. Haruhiko Kuroda told a news conference that the steps are “supplementary measures” intended to support companies by further improving the business environment, though they do not amount to additional monetary easing aimed at coping with downside risks of the economy and deflation.

“Although there are many companies which are working to engage in capital spending and investing in human resources, such moves vary among sectors and individual companies,” Kuroda said. “We decided to extend as much support as possible so these moves would spread.”

But economists doubt the new steps will actually lead to such an outcome. This was suggested by the stock market’s reaction Friday, which left the key Nikkei stock index sharply lower after an initial knee-jerk surge of more than 500 points.

Compare that with the nearly 5 percent jump the Nikkei logged in October 2014, when the BOJ surprised the market by announcing further monetary easing to considerably accelerate the expansion of Japan’s monetary base.

“I got the impression that the limits of monetary easing are nearing,” said Shotaro Kugo, economist at Daiwa Institute of Research. “The measures are weak compared with previous ones that brought surprises to the market.”

“The BOJ was unable to implement bold easing measures, even though it wanted to,” Kugo said.

The BOJ wants to take more steps, given weakening inflation expectations among firms and the subdued recovery, but there is little room left for expanding its quantitative easing, Kugo said.

The economy is expected to grow only moderately, according to many economists, though it narrowly avoided recession in the July-September quarter with an annualized real 1.0 percent uptick in gross domestic product amid a slowdown in the Chinese economy.

The central bank’s tankan business sentiment survey showed earlier this week that firms expect consumer prices to climb 1.0 percent next year, down from the 1.2 percent predicted in the September survey and far less than its 2 percent inflation target.

With crude oil prices continuing downward, consumer prices fell in October for the third month in a row, making it difficult for the BOJ to achieve its inflation goal as projected around the second half of fiscal 2016.

Despite the market’s disappointment, the reform-challenged government welcomed the BOJ’s steps, with Cabinet ministers calling the measures “appropriate.”

“They are in accordance with the government’s policy of promoting capital investment and raising wages,” said Economic and Fiscal Policy Minister Akira Amari.

The Abe government has been urging companies to raise wages and boost investment using the record profits they have been enjoying under his deflation-fighting “Abenomics” program, because it wants to achieve an economic recovery led by private-sector demand amid fiscal constraints.

But the prospects remain unclear, as companies may forgo business investment and refrain from sharply increasing wages as the slowing Chinese and emerging economies remain a source of concern, while consumer spending lacks strength to lift the overall economy amid the ongoing decline in job security and benefits.

“The BOJ provided indirect support for the government,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. “They are technical life-prolonging measures” to continue its bond purchase program and set the stage for additional easing.

While the BOJ is trying to help the government pursue its goals within its own capabilities, the effects are likely to be limited, he said.

“No business operators would be willing to raise wages or increase capital investment just by seeing these measures,” Ueno said. “Government pressure” — albeit not necessarily preferable — “would be more effective.”