Business / Economy

Bank of Japan adopts unlimited JGB purchases to buoy economy in pandemic

Reuters, Bloomberg

The Bank of Japan expanded monetary stimulus on Monday and pledged to buy unlimited amount of bonds to keep borrowing costs low as the government tries to spend its way out of the deepening economic pain from the coronavirus pandemic.

The move puts the BOJ in line with other major central banks that have unleashed unprecedented amounts of monetary support as the health crisis stokes fears of a deep global recession.

The central bank also sharply cut its economic forecast and projected inflation would fall well short of its 2 percent target for three more years, suggesting its near-term focus will be to battle the crisis.

“The spread of the coronavirus at home and abroad is inflicting a severe impact on Japan’s economy,” BOJ Gov. Haruhiko Kuroda told a news conference after the policy meeting in Tokyo.

“The achievement of the BOJ’s 2 percent inflation target … will take time. The outlook for prices is highly uncertain,” he added.

To ease corporate funding strains, the BOJ said, it will boost by threefold the maximum amount of corporate bonds and commercial debt it buys to ¥20 trillion.

The central bank also clarified its commitment to buy unlimited amounts of government bonds by scrapping loose guidance to buy them at an annual pace of ¥80 trillion.

“The BOJ will purchase necessary amounts of government bonds without setting an upper limit” to keep long-term interest rates around its 0 percent target, the statement said.

The central bank said it would buy government bonds and short-term securities “actively” for the time being to keep markets stable as the government issues more bonds to pay for its huge stimulus package.

“For the BOJ, the removal of the bond-buying target is like killing two birds with one stone,” as it can ramp up bond buying now and whittle it down later if it wants to end ultraloose policy, said Toru Suehiro, senior market economist at Mizuho Securities.

“With today’s move, the BOJ can stand pat on monetary policy for the time being void of a disruptive market move,” he said.

At the meeting on Monday, cut short by a day as a precaution against the spread of the pandemic, the BOJ kept its interest rate targets unchanged, as had been widely expected.

The central bank, however, offered to pay a 0.1 percent interest to financial institutions that tap its new loan program to combat the pandemic — a move aimed at encouraging commercial banks to boost lending to cash-strapped firms.

The BOJ’s rate review precedes those this week by the Federal Reserve and the European Central Bank, which have sailed into uncharted territories to keep their economies afloat.

Corporate funding costs have crept up in Japan despite the BOJ’s decision last month to boost buying of risky assets, including corporate bonds and commercial debt, and create a loan program to assist funding of firms hit by the pandemic.

Removing the guidance on its bond buying is largely a symbolic move. The BOJ has only purchased less than ¥20 trillion per year, as the bank’s huge presence in the market allows it to control yields with fewer purchases.

Still, the government welcome the move as a sign the central bank would help keep borrowing costs low to pay for the huge cost of battling the pandemic.

“Today’s decision would enhance the effect of a policy mix,” between the government and the central bank, Economy Minister Yasutoshi Nishimura told reporters after attending the BOJ’s meeting.

Some economists saw the ditching of the largely symbolic guideline as a further sign of the BOJ’s limited policy firepower beyond its assistance to help corporate financing.

“The BOJ strengthened its policy in line with expectations, but it failed to go beyond expectations. That shows the BOJ has been running out of ammunition, and it’s getting harder for the BOJ to create fresh measures,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute and a former Bank of Japan official.

In its quarterly outlook report, the BOJ made sweeping downgrades across projection years through March 2023, forecasting a contraction of up to 5 percent this fiscal year.

Japan expanded a state of emergency this month that asks citizens to stay home and businesses to close, adding to woes for an economy already on the cusp of recession.

To ease the pain on the economy, the government boosted its spending package last week to a record ¥117 trillion, which will be paid for partly by issuing more bonds — straining Japan’s already tattered finances.

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