The Bank of Japan's massive stimulus program could get even bigger
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Despite a less than stellar start to its negative interest rate policy, alongside an increasing chorus of negative opinions from analysts and investors alike, Bank of Japan governor Haruhiko Kuroda isn’t perturbed one bit, suggesting earlier today the central bank wouldn’t hesitate to act if market volatility threatens its efforts to defeat deflation.
Addressing Japan’s parliament, Kuroda told lawmakers that while the bank doesn’t specifically target exchange rates or stock prices, it would be willing to contemplate further monetary policy easing, including taking interest rates further into negative territory, should financial market movements threaten confidence, intensifying what he called the “deflationary mindset” of investors.
On January 29 the BOJ stunned financial markets, announcing that it was to charge a negative interest rate on a proportion of deposits placed at the bank by financial institutions.
According to the Wall Street Journal, Kuroda told lawmakers that was one reason behind the central bank’s decisions in January to expand its stimulus program with moves designed to decisively eliminate a negative cycle of dropping prices and weak growth.
The decision to implement negative interest rates, at least according to five of the Bank of Japan’s nine policymakers who voted in favour if the action, was to lower borrowing costs and encourage firms to lend to the private sector rather than parking excess reserves with the BOJ.
“We will continue to closely watch the situation of the financial markets to determine whether it could have an impact on Japan’s economy and price trends, and if we judge that it will have adverse effects, we will not hesitate to consider countermeasures,” Kuroda told the politicians.
Since October 2014, the bank has pledged to expand the nation’s monetary base at an annual pace of about 80 trillion yen (US$700 billion) through the purchase Japanese government bonds (JGBs), exchange traded funds (ETFs), Japan real estate investment trusts (J-REITs) and corporate debt issued by Japanese firms.
As a result of the BOJ’s asset purchases, the bank now owns 34% of all outstanding Japanese government debt, equating to $US2.56 trillion, with that figure expected to grow to more than 50% by the end of 2017.
It also holds 7.8 trillion yen in Japanese exchange traded funds (ETF), representing 54% of the entire Japanese ETF market.
That’s a lot of asset purchases to beat a “disinflationary mindset”, particularly given recent economic data, including consumer price inflation.
Despite all the easing implemented by the bank inflationary pressures remain non-existent.
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Outside of recent labour market data, the majority of other data points have been weak, including economic growth which contracted 1.4% in annualised terms during the past quarter.
While Kuroda believes that asset purchases and negative interest rates will help to stimulate activity, given recent economic data and the scale of asset purchases made by the bank since it QQE program in April 2013, it’s little why others are sceptical as to whether the plan will work.
Indeed, one only had to look at the market reaction on Wednesday to see just ineffectual his words have been. The Nikkei 225 closed the session at 19,120, a decline of 0.85%, while the USD/JPY is currently trading at 111.72, on track for its lowest closing level since October 2014.