Bank of Japan gives off mixed signals: aggressive monetary policy with a deferred start-date

January 22, 2013
January 22, 2013

The die seems cast: Japan is officially going all-out in a war against deflation and recession, as Japan’s central bank today closed out its two-day policy board meeting by agreeing to open-ended asset-purchasing until it hit a 2% inflation target. The “open-ended” approach and the switch from an inflation “goal” to a “target” are key communication tools clarifying BoJ’s commitment to a set economic outcome, as opposed to an arbitrary end-date for loose monetary policy. This Federal-Reserve-style approach builds confidence in an economic course that investors, businesses and consumers can base decisions on without fear of a sudden policy reversal, which BoJ is known for having done in the past.

In this case, “open-ended” means that the bank will buy ¥13 trillion each month until inflation hits the 2% target, which it announced last Friday. By adopting this aggressive monetary policy, the historically conservative BoJ is signaling that it is indeed serious about hitting the 2% inflation target that, under pressure from new Prime Minister Shinzo Abe, it agreed to last week.

But there’s a catch—a big one. BoJ will only start its open-ended asset-purchase program a year from now, in January 2014. That means it will continue with the current pace of regularly adjusted easing for the rest of the year. “The timing is the factor that caused the market to be a little disturbed,” Jeremy Stretch, head of foreign- exchange strategy at Canadian Imperial Bank of Commerce in London, told Bloomberg. “We haven’t seen the big bazooka being taken out in terms of the weakening of the yen, which is implicit in getting anywhere near that inflation target.” Markets apparently agreed with him, as the yen snapped back more than 1% against the dollar today.

Though the yen has shed some 13% against the dollar in the last two months, Japan’s deflation problem seems to be more pernicious—the bank projects core inflation at only 0.9% for 2014. That’s a long way from the 2% target. And perhaps the BoJ’s conservative twist on its open-ended purchasing plan is designed to reflect a longer-term, more gradual approach to routing deflation than the fiscal tack that Abe has championed, which is focused on near-term jolts to the economy. Indeed, given the risks to Japanese interests rates if inflation flares up beyond 2%, such prudence isn’t wholly unadvisable, as we touched on previously. It is, however, less of a shot in the arm than what markets were hoping for. Or probably more importantly, than what they expected.

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