Japan's quantitative easing A bigger bazooka - Economist

http://www.economist.com/blogs/banyan/2014/10/japans-quantitative-easing?fsrc=nlw%7Cnewe%7C3-11-2014%7C

A bigger bazooka

Oct 31st 2014, 17:11 BY T.B. | TOKYO

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THE riposte to doubts about Abenomics, the three-part plan of Shinzo Abe, Japan’s prime minister, to shake the country from its economic torpor, is more of the same, and a lot more. On October 31st the Bank of Japan (BoJ) stunned the financial markets by unexpectedly expanding its programme of quantitative easing. The bank’s existing measures, a “different dimension” of easing from past efforts, were already daringly bold. Now it will swell Japan’s monetary base at an even faster pace, by around ¥80 trillion ($712 billion) each year, up from ¥60 trillion-70 trillion currently. To do so, it will hoover up still larger quantities of Japanese government bonds (JGBs). This additional step, said Haruhiko Kuroda, the governor of the BoJ, “shows our unwavering determination to end deflation”.

The bank’s action is also an admission of partial failure thus far. Its bond-buying has succeeded in sparking some inflation, yet its goal of achieving price rises of 2% a year by around April 2015 remains a distant possibility. Along with the government, it badly underestimated the dampening effect of a hike in the consumption tax in April this year, which caused the economy to shrink by 1.7% in the second quarter. Because of faltering consumer and corporate demand, and falling oil prices, inflation is now heading in the wrong direction, and may dip beneath 1%.

 

In recent weeks, economists had started to question Mr Kuroda’s oft-stated commitment to banishing Japan’s entrenched deflationary psychology. They suggested that the bank’s formerly conservative mindset might even be returning. Mr Kuroda’s predecessor, Masaaki Shirakawa, pursued monetary easing only half-heartedly, and achieved little. Meanwhile, Mr Kuroda had sought to stealthily extend the deadline for exiting deflation. That did little to reassure that Abenomics was on track in spite of stalled growth and sluggish inflation. Upon announcing the additional easing, Mr Kuroda admitted that matters had reached a “critical point”, as the bank’s efforts were losing momentum.

Now a fresh round of no-holds-barred QE will immediately boost Mr Abe’s economic plan. The Nikkei stock index—a vital gauge of success for the government—rose to its highest level in seven years on the news. The yen lurched further downwards, which will help import inflation. In addition to the tidings from the central bank, there was still more sugar on offer for equity markets. The Government Pension Investment Fund (GPIF), the world's largest, said it would slash its holdings of government bonds from 60% to 35% in order to buy more shares. The strength of the co-ordination between the government, the BoJ and the ministry of labour, health and welfare, which oversees the GPIF, surprised observers. After the GPIF’s changes, most economists had not expected further monetary easing until 2015.

The BoJ’s action this week also took markets aback because in recent public appearances Mr Kuroda had stuck to a bullish economic outlook. Yet on October 31st the BoJ halved its forecast for economic growth for the 2014 fiscal year to 0.5%. The bank also made its timeframe for achieving 2% inflation open-ended, removing its two-year deadline. Nonetheless, following the additional easing, the central bank still expects to meet its inflation target in 2015. As well as buying an additional ¥30 trillion of JGBs a year, the BoJ will also purchase more risky assets in the form of exchange-traded funds and investment trusts in Japanese property.

A motivation for Mr Kuroda—in addition to visibly slowing inflation and weak growth—may have been an intensifying political debate over whether or not Mr Abe should again raise the unpopular consumption tax from 8% to 10% in 2015. The BoJ is strongly in favour of a second hike in order to repair Japan’s stretched public finances. More monetary easing should encourage Mr Abe to press ahead.

But this latest round of QE is not without its detractors. In April 2013 the BoJ’s nine-strong policy board voted unanimously in favour of its radical new monetary drive, this time it revealed a rare split. Four members voted against the expansion of monetary easing, which came just two days after America’s Federal Reserve ended its third round of QE. It is unclear whether or not the dissenters disagreed with the extra stimulus itself, or merely with its timing. This week’s further easing will intensify the worries around the policy announced last spring. Chief among these is that QE will be hard to exit without alarming the bond market. Yet for the time being, Mr Kuroda is waging a more dogged fight against deflation. The prospect of Japanese “tapering” is ever more distant.