On Thursday, the Bank of Japan announced a tremendous monetary initiative aimed at turning around years of slow or negative economic growth.
“The Bank will achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index at the earliest possible time, with a time horizon of two years,” wrote Japan’s central bank in a statement issued April 4. That 2 percent inflation rate is the same targeted in the U.S., UK, and EU, and has apparently become the widely-accepted speed limit for monetary expansion.
Hitting this speed limit during a long period of stagflation will be a monumental task. “In order to do so,” the BoJ comments, it “will enter a new phase of monetary easing both in terms of quantity and quality. It will double the monetary base and the amounts outstanding of Japanese government bonds as well as exchange-traded funds in two years, and more than double the average remaining maturity off JGB purchases.”
This initiative, championed by BoJ Governor Haruhiko Kuroda and Prime Minister Shinzo Abe, shares a lot in common with the highly-accommodating monetary policy seen in the U.S. However, where the Federal Reserve is throwing $85 billion at the yield curve every month, or about 0.6 percent of GDP, the BoJ will be spending 7.5 trillion yen ($80 billion per month), or almost 1.4 percent of GDP. Purchases will be made in six installments a month.
With all this on the table, the BoJ turned its attention specifically to the monetary base…