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…
“With a view to pursuing quantitative monetary easing, the main operating target for money market operations is changed from the uncollateralized overnight call rate to the monetary base,” wrote the BoJ. “Specifically, the guideline for money market operations is set as follows: The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen.”
Taking another page out of the increasingly-familiar Bernanke playbook, the BoJ notes: “The Bank will continue with the quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will examine both upside and downside risks to economic activity and prices, and make adjustments as appropriate.”
However, perhaps anticipating Mr. Market’s mood swing, the BoJ adds this detail in its statement: “In order to facilitate the aforementioned massive JGB purchases and significantly large-scale provision of the monetary base, the cooperation of market participants — such as counterparties’ active bidding in the Bank’s market operations — is vital. The Bank will set forums for enhanced dialogue with those market participants in order to exchange views pertaining to money market operations and market transactions more generally.”
To some observers, this intense burst of monetary action looks like a Hail Mary. Japan has suffered through more than two decades of slow or negative growth. The collapse of stock and housing bubbles in 1989 effectively put the nation’s economy into a tailspin from which it has never fully recovered. The nation was not spared from the 2008 financial crisis, either, and taken all together Japan’s economy has been in do-or-die mode for years.
Currently, the country faces an evaporation of investment and profits. The BoJ’s strategy is aimed at increasing the price of stocks, bonds, and other financial assets. Property prices may even pick up on some of the monetary mojo. The downside is that if Japan hits its target inflation rate and wages don’t go up in line, then there will be a decline in living standards.
Internationally, there is concern about the effect that Japan’s monetary policy will have on the strength of the yen. The nation’s currency has been weakening against major trading partners rapidly in recent months, and critics fear that the BoJ is implementing a beggar-thy-neighbor policy.