Bearish take on the besieged Bank of Japan

By:
Euromoney Skew, Sid Verma
Published on:

The Bank of Japan's new asset-purchasing programme and likely shift in its inflation stance will prove no game-changer for growth, say market players.


Fears over politicization, the relentless expansion of its balance sheet through aggressive asset purchases and going soft on inflation. While this tripartite motto could easily describe the challenges facing the US Federal Reserve, European Central Bank and Bank of England, the Bank of Japan (BoJ) is embroiled, as ever, in the mother of all quantitative-easing challenges.

On Thursday, the BoJ surprised markets with an earlier-than-expected monetary-easing plan, with a ¥10 trillion increase in its asset-purchasing programme, while signalling its intention to soften its 1% inflation target. However, the action was greeted with market scepticism, with Japanese equities immediately selling off upon the announcement. Here’s why, according to Capital Economics:

“The Bank of Japan's decision to raise the ceiling on its asset purchase programme by another ¥10 trillion (to ¥101 trillion) was widely expected but does not mark the major shift in policy that the markets had been hoping for. Indeed, this is the fifth time that the ceiling has been raised since April, and the previous increases have all been in the range of ¥5 trillion to ¥10 trillion. Admittedly, we had thought that the Bank might hold on until January. The proximity of today's decision to the weekend's elections may leave the policy board open to criticism that it is bowing to pressure from the newly elected LDP government. However, others might argue that the board has been too timid in the past. The balance may have been tipped anyway by the weakness of the Bank's own Tankan survey of business conditions, published last week.

"Also today, the board confirmed that it would review its inflation target in January. This will encourage speculation that the Bank will raise the target from 1% to 2%, as advocated by the LDP. However, this would not be such a dramatic change either. Currently the Bank of Japan has a medium to long-term target range of, in effect, 0% to 2%, with the goal set at 1% 'for the time being' (in part we suspect because it would be unrealistic to aim any higher, the impact of consumption tax hikes excluded). The Bank reviews the price stability framework every year and the next review was due anyway early in 2013. The upshot is that changing the inflation target from 1% to 2% would simply be aiming for the top of the existing range.

"A cynic would suggest it simply means that the Bank will now miss a target of 2%, rather than one of 1%.” 

In short, same old.