Bank of Japan Gov. Haruhiko Kuroda on Thursday revealed his strategy for ending more than a decade of deflation by expanding the central bank’s purchases of government bonds and allowing it to buy riskier assets.
The bank will “enter a new phase of monetary easing in terms of quantity and quality,” Kuroda said in explaining that the moves will double Japan’s monetary base and the amount of outstanding Japanese government bonds and exchange-traded funds within two years.
“This is coming from a different level in both quality and quantity,” Kuroda told reporters after the two-day Policy Board meeting. “We have put forward everything there is to do at this point,” he said.
The bar is set high for Kuroda, who has been tasked with ending the country’s chronic deflation.
The former chief of the Asian Development Bank said the BOJ will aim to expand the amount of outstanding JGBs by hiking purchases to an annual pace of ¥50 trillion.
Increasing the amount outstanding of the bank’s JGBs at an annual pace of ¥50 trillion will bring the current balance of ¥89 trillion to about ¥140 trillion by the end of 2013 and ¥190 trillion by the end of 2014.
It also will target longer-term debt, including JGBs with maturities as long as 40 years, as well as ETFs and real estate investment trusts, it said.
Tossed to the policy wayside, however, was the BOJ’s “bank note principle,” which caps the amount of long-term bonds in the BOJ’s possession to below the outstanding balance of bank notes in circulation.
Introduced in 2001, the bank note principle basically required that the BOJ ensure that the outstanding amount of long-term JGBs it effectively held be less than the outstanding balance of bank notes issued.
“If a central bank that holds such a large amount of government bonds were to purchase those bonds without making its fundamental principle of the purchases clear, increased uncertainties would create a risk premium and lead to a rise in yields on long-term government bonds,” former BOJ Gov. Masaaki Shirakawa said in a speech in 2011.
But Kuroda said the BOJ would not be able to reach the inflation target under that self-imposed rule, and thus the Policy Board agreed to temporarily suspend it.
With that limit out of the way, the BOJ will proceed to spend about ¥7 trillion a month buying bonds, allowing its JGB holdings to eclipse the money supply.
Kuroda said he’d allow this monetary experiment to run until the inflation target is met.
He also said the main target of the BOJ’s operations would switch from the uncollateralized overnight call rate to the monetary base, which will be fattened via money market operations to the tune of about ¥60 trillion to ¥70 trillion a year.
The adoption of a monetary base control was agreed upon “with the view of pursuing quantitative monetary easing,” the BOJ said.
Whereas the bank had adopted a virtually zero interest rate policy by maintaining the target for the uncollateralized overnight call rate at “around 0 to 0.1 percent,” the new operating target will aim to boost the monetary base so that it will increase at an annualized pace of approximately ¥60 trillion to ¥70 trillion. This will bring the amount outstanding in the monetary base from ¥138 trillion at the end of 2012 to approximately ¥200 trillion by the end of 2013 and to ¥270 trillion at the end of 2014.
“The incremental measures that had been taken previously cannot end deflation or help reach the 2 percent goal,” Kuroda explained.
Kuroda, who was appointed last month, had said he was confident the 2 percent inflation target could be reached in two years and said he would “do all there is to do” to achieve it.
But some, including his predecessor, Masaaki Shirakawa, warn that “excessive” monetary easing could be viewed as a hazard — that the central bank was financing the government.
That concern might bring the government’s resolve to pursue fiscal reform into doubt and cause long-term interest rates to spike, endangering the economy, some say.
Touching on such concerns, the bank said in a statement that JGB purchases “are executed for the purpose of conducting monetary policy and not for the purpose of financing fiscal deficits.”
“We have no intention” of financing the government, Kuroda told reporters, repeating that it is merely a way to reach the 2 percent inflation target.
On the outlook of the economy, the BOJ said it will likely return to a moderate recovery path due to pickup in growth rates of overseas economies and other factors. “In recent months, conditions in financial markets have turned favorable due to the abatement of global investors’ risk-aversion and expectations for domestic policies,” the bank also said.
Thursday’s meeting was also attended by economic revitalization minister Akira Amari. The BOJ Policy Board will convene for a meeting again later this month.
BOJ policy commitments spearheaded under Kuroda
The BOJ Policy Board:
• Pledges to achieve 2 percent inflation within around two years.
• Will increase long-term Japanese government bond holdings at an annual pace of ¥50 trillion to push down interest rates.
• Will buy government bonds of all maturities, including 40-year bonds.
• Aims to extend the average remaining maturity of the BOJ’s JGB purchases from less than three years to about seven years.
• Will invest ¥1 trillion in exchange-traded funds and ¥30 billion in real-estate investment trusts annually.
• Will introduce a new monetary easing scheme centered on integrating its two bond-buying programs into one.
• Vows to continue quantitative and qualitative monetary easing until 2 percent inflation is achieved in a stable manner.
• Will temporarily suspend the “bank note principle,” which requires the BOJ not to hold government bonds worth more than the value of bank notes in circulation.
• Will adopt the “monetary base” as the main operating target for money market operations, instead of the overnight call rate.
• Will conduct monetary market operations so Japan’s monetary base expands at an annual pace of about ¥60 trillion to ¥70 trillion per year. The monetary base is cash in circulation and the balance of current-account deposits held by financial institutions at the BOJ.
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