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Saturday 20 September 2014

Japan central bank in fresh bid to revive economy with cash

Elaine Kurtenbach

Published 05/04/2013 | 05:00

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New Bank of Japan governor Haruhiko Kuroda points at a chart projecting his quantitative and qualitative monetary easing plans

JAPAN is making a drastic shift in monetary policy in its latest attempt to spur inflation and get the world's third-largest economy out of a long, debilitating slump.

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Bowing to demands from Prime Minister Shinzo Abe, the Bank of Japan (BoJ) announced yesterday that it would reconfigure its policies to double the money supply, or the amount of funds in circulation, and achieve a 2pc inflation target at the "earliest possible time".

The central bank has launched "a new phase of monetary easing both in terms of quantity and quality" that it said would "drastically change the expectations of markets and economic entities".

Financial markets reacted with relief. The Japanese yen, which was trading at about 92.8 yen per US dollar, dropped to about 94.95 yen per dollar by mid-afternoon after the announcement. The benchmark Nikkei 225 stock index rebounded from negative territory to close 2.2pc higher.

New BoJ governor, Haruhiko Kuroda, has vowed to meet the inflation target within two years, heeding demands from Mr Abe to once and for all end a long spell of deflation that has hindered investment and economic growth.

Mr Abe's government, which took power late last year, accused the previous central bank governor, Masaaki Shirakawa, of balking at undertaking bold enough monetary easing to get the economy back on track.

Monetary policy

The steps announced yesterday under the first policy meeting chaired by Kuroda were in line with, or perhaps a bit bolder, than had been expected.

"The first step is to get out of deflation and get a much higher nominal growth rate," Kozo Yamamoto, a senior lawmaker in Abe's Liberal Democratic Party, said. A doubling of the money supply was needed to achieve that aim, he said.

The policies announced yesterday are a fundamental shift in how the BoJ conducts monetary policy and appear a major concession to government demands, despite the bank's ostensible autonomy.

To further boost the economy, the government has increased public spending to help perk up demand, and has promised reforms to help make the economy more competitive.

Whether these strategies work will hinge on expectations of future inflation prompting consumers and companies to begin spending money sooner to avoid rising prices, as Mr Abe and his backers contend.

The past 15 years of deflationary stagnation, they say, is largely due to the tendency of consumers to hold back, waiting for prices to fall further. Expectations of weak demand, especially given Japan's shrinking and aging population, discouraged corporate hiring and investment, pulling prices lower.

Critics of so-called 'Abenomics' say that without wage increases to match the price hikes, frugal consumers may be even less willing to spend.

In any case, the BoJ has delivered on Kuroda's promises for bolder action.

Instead of carrying out money market operations to target an interest rate level, the central bank will focus on increasing the monetary base, or total amount of cash in circulation and funds of commercial banks held by the central bank, by about 60 trillion yen to 70 trillion yen (€497bn to €581bn) a year. (AP)

Irish Independent

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