The nation’s central bank announced on Thursday that it would double the amount of money in circulation and try to produce annual inflation of about 2 percent. “This is monetary easing in an entirely new dimension,” Mr. Kuroda said after the bank’s decision.
The central bank said it had inflated the economy by aggressively buying longer-term bonds and doubling its government bond holdings in two years. The bank said it would aim to create a robust 2 percent inflation rate “at the earliest possible time.”
This major shift in Japan’s monetary policy is a stark contrast to years of what many economists said was a halfhearted battle to end deflation. Deflation is a damaging fall in prices, profits and wages, and it weighs on economic growth.
Prime Minister Shinzo Abe, who took office in late December, has made beating deflation a central point of his economic policy. He wrestled with the bank’s former leaders over creating the 2 percent inflation goal. Mr. Abe’s pressure was so relentless that the bank’s previous governor, the moderate Masaaki Shirakawa, resigned weeks before the end of his term. That departure led to the appointment of Mr. Kuroda, who shares Mr. Abe’s economic philosophy.
Mr. Kuroda emphasized the break with history, repeatedly pointing to a graph showing the planned jump in the country’s money supply as he answered reporters’ questions on the bank’s new policies.
“Incremental steps of the kind we’ve seen so far weren’t going to get us out of deflation,” Mr. Kuroda said. “I’m certain we have now adapted all policies we can think of to meet the 2 percent price target,” he said.
And if prices do not rise as expected, he said he “would not hesitate” to step up the bank’s easing program. Mr. Kuroda faulted his predecessors for fearing the possibility of igniting runaway inflation and for being too ready to pull back at the first sign of higher inflation.
Japanese stocks have soared in recent months on anticipation of a reversal in monetary policy under Mr. Abe. It was fanned by recent assurances from Mr. Kuroda that he would do “whatever it takes” to defeat deflation.
But in recent days, the stock market had retreated as investors wondered whether Mr. Kuroda would make good on his promises.
Shortly after the bank’s announcement, the benchmark Nikkei 225 index jumped from negative territory to end the day 2.2 percent higher. The yen weakened to 96.13 yen per dollar in Tokyo from about 93 yen before the announcement.
“Kuroda did it,” Masaaki Kanno, economist at JPMorgan Securities Japan, said in a note to clients. “This is a historical change in the B.O.J.’s policy.”
Some economists were cautious, though. The central bank’s giant purchases of government debt could eventually be seen by investors as enabling runaway public spending, quashing confidence that Japan would ever pare its already sky-high public debt. They also said it could also drive up long-term interest rates.
If Japan recklessly pursued aggressive monetary and fiscal policies, “the long-term interest rate could rise and fiscal collapse would ensue,” said Ryutaro Kono, an economist at BNP Paribas.
Others argue that rising prices, once stoked, can be hard to control, a fear related to memories of Japan’s bubble economy of the 1980s and the subsequent painful collapse.
Some experts also question whether monetary policy alone can end deflation in Japan. The country has other deflationary pressures like an aging and shrinking population and cumbersome regulations that make the economy inefficient. They say that lending has not increased at a high enough rate despite the easy money already available because businesses and consumers see little potential for growth.
Mr. Kuroda said that such risks or doubts should not hold the bank back from fighting deflation.
Article source: http://www.nytimes.com/2013/04/05/business/global/japan-initiates-a-bold-bid-to-end-years-of-falling-prices.html?partner=rss&emc=rss
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