Bringing out the big guns
The Bank of Japan's new governor is abandoning the bit-by-bit approach of his predecessors to deploy the US-style weapon of escalated easing
Haruhiko Kuroda followed in the footsteps of Ben Bernanke and Mario Draghi on Thursday as he swung the Bank of Japan from incremental moves to unprecedented stimulus in his first policy meeting as governor.
The central bank would double the monetary base by the end of 2014 through buying government bonds, it said, in Japan's biggest round of quantitative easing. JP Morgan Chase said the Japanese and US central banks were now "in the same camp" when it came to monetary stimulus.
With the Federal Reserve, the European Central Bank (ECB) and the Bank of Japan pulling in the same direction, the risk for Kuroda is that taking an activist role may fuel expectations for more measures that he won't be able to live up to. The yen fell to its weakest since 2009 yesterday and stocks surged for a third day as investors expect Kuroda to revive an economy where prices are back at 1992 levels.
"A huge economic experiment is starting," said Junichi Makino, chief economist at SMBC Nikko Securities, a unit of Japan's second-largest bank. "I see a risk that Kuroda will be the governor who proves the limit of monetary easing by doing everything that a central bank can."
At stake is the credibility of Prime Minister Shinzo Abe's economic programme - dubbed Abenomics - and the chances of ending two decades of stagnation and meeting a 2 per cent inflation goal. "It's true that the price target won't be easy, but we can't meet it by incremental easing," Kuroda said. "I'm confident that every essential measure is included in [Thursday's] decision."
The Bank of Japan set a two-year horizon for its inflation goal and said it was shifting its attention from the benchmark interest rate to the monetary base - cash in circulation and the money that financial institutions have on deposit at the central bank. It predicts the measure will grow to 270 trillion yen (HK$22 trillion) by the end of next year.
ECB president Draghi broke with predecessor Jean-Claude Trichet by pursuing a more forceful campaign to end the euro-zone debt crisis, declaring there were no "taboos" for the bank. Draghi said on Thursday that policy would stay accommodative for as long as needed.
Fed chairman Bernanke has overseen more than US$2 trillion in emergency aid, three rounds of asset purchases and record-low interest rates. The ECB took five years from 2008 to achieve a near doubling in its balance sheet, as the Bank of Japan is planning. Bernanke boosted the Fed's by more than 150 per cent in four months during the global financial crisis. "Kuroda is easing more than Draghi," Nomura Securities senior economist Shuichi Obata said.
"He's also buying more risky assets, such as exchange-traded funds, so in that sense he's more aggressive than Bernanke."
Kuroda's predecessor, Masaaki Shirakawa, failed to end price falls in a term marred by three recessions, leaving the economy smaller than when he took office. When he announced he was stepping down, stocks soared to a four-year high. the Nikkei-225 Index rose 2.2 per cent on Thursday.
The world's third-biggest economy grew an annualised 0.2 per cent in the fourth quarter of last year after two consecutive contractions. Prices excluding fresh food have not risen 2 per cent in any year since 1997, when the sales tax increased. In February this year, they fell 0.3 per cent.
By abandoning an interest-rate target in favour of goals for the size of the monetary base, Kuroda is digging into a similar toolkit as that used by Paul Volcker, who became chairman of the Fed in 1979 with the opposite task: to break the back of inflation that was too high.
The Fed targets a near-zero rate for overnight interbank loans even after shifting its focus four years ago to buying bonds and boosting the size of its balance sheet.
The Bank of Japan's 2 per cent inflation target echoes the Fed's adoption of a 2 per cent goal in January last year. Bernanke told lawmakers in Washington in February that he supported Japan's efforts to exit deflation.
"Kuroda is very mindful of the Fed, he wants to catch up," said Kazuhiko Ogata, chief Japan economist at Credit Agricole. "He is trying to lift Japan's economy by keeping the yen weak, boosting stocks and improving sentiment."
Kuroda's pledge last month to do "whatever it takes" to end deflation came after Draghi made the same vow last year in relation to saving the euro.
The Bank of Japan's board agreed on Thursday to temporarily suspend a cap on bond holdings and dropped a limit on the maturities of debt the bank buys.
It will buy 7.5 trillion yen of bonds a month along with more risk assets, a shift Kuroda said would mean the bank was buying the equivalent of 70 per cent of government bond issuance.