Not many people were expecting this one.
The Bank of Japan has increased its monetary stimulus program only two days after the Federal Reserve raised U.S. interest rates for the first time in nearly a decade.
The moves announced are not big in themselves, but send an important signal to financial markets to underline the notion that, while the U.S. economy may have recovered from the financial crisis and the Great Recession, the process of repair in Japan still has longer to run.
The BoJ’s action was a surprise because it had left policy unchanged in October when many people had expected it to respond to a fresh slowdown in the economy. That led to speculation that it was beginning to lose faith in its ability to get inflation back to the desired level of 2%. Japan has had a decade-long struggle with deflation and the jury is still out over who is winning.
The effect on financial markets was the opposite of the one the BoJ probably intended. After falling around 0.5% initially on the news, the yen reversed course and finished the day nearly 1% higher against at 121.41 to the dollar.
In that respect, it’s a curious echo of the disappointment in financial markets that met the European Central Bank’s underwhelming easing measures last week. The euro rose to a six-week high against the dollar after that, and has given up less than half of its gains since the Fed’s move opened up clear blue water between it and the ECB.
The BoJ said it will buy an extra 300 billion yen ($2.4 billion) a year in exchange-traded funds to keep the the cost of capital for Japanese companies low, giving them more room to invest and hire. That’s an increase of 10% from the current level. It also lifted the limit on the volume of real-estate fund shares it can buy.
In addition, it will also buy longer-dated bonds through its quantitative easing program than had been the case to date. It will now buy bonds with maturities of up to 12 years rather than the 10-year maximum now. However, it won’t increase the volume of asset purchases beyond the current 80 trillion yen a year.
At his press conference later, Governor Haruhiko Kuroda said that the measures were less about stimulating the economy now, than about ensuring that the policy can feed through to it smoothly.
“Companies and households are shifting away from a deflationary mindset,” Reuters quoted Kuroda as saying. “But there are discrepancies among sectors, so we want to broaden the positive momentum.”
There have been concerns in the market the BoJ was running out of bonds to buy because of the sheer scale of its quantitative easing, and that its self-imposed restrictions on the classes of asset it can buy were creating distortions in the country’s financial markets.
“Today’s steps aren’t monetary easing because we don’t see risks to the economy and prices as heightening or materialising,” Kuroda said. “We actually revised up our assessment on exports and the latest tankan survey showed companies upgrading their revenue plans. We don’t see economic and price conditions undershooting our estimates.”