BOJ Doubles Bond Purchases in First Kuroda Easing Salvo
Bank of Japan (8301) Governor Haruhiko Kuroda began his onslaught to end two decades of economic stagnation and 15 years of deflation as the central bank pledged unprecedented easing, driving the yen's biggest slide since 2011.
The BOJ plans to purchase 7.5 trillion yen ($78.6 billion) of bonds a month and double the monetary base, which includes cash in circulation, in two years, the central bank said in Tokyo today. That exceeded economists’ median estimate of 5.2 trillion yen a month and is the biggest move since quantitative easing began in 2001.
Stocks surged as Kuroda won investors’ confidence in a campaign to revive the world’s third-biggest economy, mired in three recessions in the past five years. The BOJ set a two-year horizon for the price target under a “new phase of monetary easing,” as the governor won the backing of a board mostly appointed by the previous government.
“It’s fast and furious,” said Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, and formerly of Goldman Sachs Group Inc. “The specific mention of a two-year time horizon was a positive surprise.”
The Nikkei 225 Stock Average (NKY) rose 2.2 percent and is up 45 percent from mid-November. The yen slid 2.6 percent to 95.45 per dollar at 8:50 p.m. in Tokyo, the largest one-day decline since October 2011. Yields on 10-year Japanese bonds touched a record low of 0.425 percent.
The BOJ said it changed the target for money-market operations from the overnight call rate to the monetary base -- cash in circulation and the money that financial institutions have on deposit at the central bank. It predicts the measure will grow to 270 trillion yen by the end of 2014. The BOJ dropped limits on the maturities of debt it buys.
The average remaining maturity of government bonds to be purchased by the bank will be about seven years under the new plan, compared with less than three previously. Monthly bond purchases stood at an average of about 3.4 trillion yen in the first quarter, according to data compiled by Bloomberg.
At stake is sustaining growth. Lawmakers can question Kuroda tomorrow on his tactics, during his second set of confirmation hearings in parliament.
The bank will increase holdings of exchange-traded funds and real-estate investment trusts, by 1 trillion yen and 30 billion yen per year respectively. The BOJ scrapped the asset- purchase program set up by former Governor Masaaki Shirakawa that was previously its main tool for easing, and said it will buy bonds with maturities of as much as 40 years.
Under a so-called banknote rule, the BOJ had pledged to keep the value of its bond holdings below the amount of cash in circulation, excluding securities held under its asset-purchase program. That guideline is “temporarily suspended,” the central bank said.
Only one board member, Takahide Kiuchi, voted against any of Kuroda’s policy proposals.
The new policies will “lead Japan’s economy to overcome deflation that has lasted nearly 15 years,” the central bank said in the statement. Gross domestic product rose an annualized 0.2 percent in the fourth quarter of last year after two straight contractions.
“Today’s decision clearly heralds a regime change at the BOJ,” said Hiroaki Muto, a senior economist in Tokyo at Sumitomo Mitsui Asset & Management. “Kuroda has embarked on an experiment of whether boosting the monetary base can prop up economic growth and eradicate deflation.”
Not everyone is confident that Kuroda’s plan will work. Former BOJ board member Atsushi Mizuno last month said more bond purchases could inflate a market bubble, while Kazumasa Iwata, a former deputy governor, deemed Kuroda’s two-year goal impossible. Prices excluding fresh food haven’t risen 2 percent in any year since 1997, when a sales tax was increased. In February, they declined 0.3 percent.
In December, Prime Minister Shinzo Abe led his party to electoral victory by pledging to fire “three arrows” to end stagnation: monetary stimulus, fiscal spending and cutting regulation to increase investment and hiring. The central bank today said its bond purchases aren’t intended to finance government spending, and emphasized the need for “a sustainable fiscal structure.”
Population aging and a government debt more than twice the size of the economy are constraints, while the yen’s decline since November is boosting the cost of fuel imports after nuclear power-plant shutdowns. Sales-tax increases set for 2014 and 2015 may damp consumption.
The European Central Bank left interest rates on hold today as policy makers weigh their options to increase stimulus. Officials kept the benchmark rate at a record low of 0.75 percent, as forecast by 54 of 56 economists in a Bloomberg News survey. Two predicted a cut.
The Bank of England held its key rate at a record low of 0.5 percent and maintained bond purchases at 375 billion pounds ($568 billion). In the U.S., initial jobless claims increased more than estimated last week, a report showed today.
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