The Bank of Japan on Friday announced that it will boost the size of its asset purchase program by ¥5 trillion. The decision follows an earlier decision in February to add ¥10 trillion to the program. As a result, the total size of the program will be raised to ¥70 trillion.

By purchasing more national bonds and financial instruments, the BOJ hopes to increase the amount of money injected into markets, thus lowering both interest rates and the yen’s value against other currencies. It is hoped that the BOJ’s step will eventually help stimulate economic activities and pull the economy out of deflation. The BOJ also decided to maintain the key interest rate at a range of zero to 0.1 percent.

The BOJ must be aware that its monetary policy is largely responsible for Japan’s deflation, believed to have continued since around 1998. It should not hesitate to continue monetary easing until the economy has a bright prospect. It should pay due attention to the fact that deflation, characterized by low demand and excess supply, suppresses business profits, lowers wages and capital investment, decreases employment and causes bankruptcy.

In February, the central bank also introduced a consumer price inflation target of 1 percent. It expects that the consumer price index will rise 0.3 percent in fiscal 2012 and 0.7 percent in fiscal 2013, still below the 1 percent target. It forecasts real economic growth of 2.3 percent for fiscal 2012 and 1.7 percent for fiscal 2013.

The central bank started the asset purchase program in October 2010, with its initial size set at ¥35 trillion. Its size was increased after the March 11, 2011, earthquake and tsunami and in August 2011. It did not produce remarkable effects at first. The boosting of the program’s size and the introduction of the inflation target in February helped somewhat to ease pressure on the yen. The projected inflation rate of 0.3 percent for fiscal 2012 is higher than the earlier projected figure of 0.1 percent. It is hoped that the BOJ will be true to bank Gov. Masaaki Shirakawa’s statement that it wants to maintain good momentum in the economy and prices.

To fill the supply-demand gap that is causing deflation, monetary policy alone will not suffice and fiscal policy will be needed. The government should rethink its attitude of being concerned only with raising the consumption tax.

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