Japan Keeps Monetary Policy Steady

In a unanimous vote, the bank’s board stuck to its strategy of expanding the monetary base at an annual pace of 60 trillion yen to 70 trillion yen, or $585 billion to $682 billion, through purchases of government bonds, commercial debt and other assets. Those moves pump money into the economy.

After the central bank’s meeting last month, it unleashed what analysts have dubbed a “shock-and-awe” monetary policy, a sea change for a bank that had come to be known in recent years for its caution and conservatism.

Under its new governor, Haruhiko Kuroda, the Bank of Japan has gone all-out to fight deflation. Declaring he would do “whatever it takes” to combat falling prices, Mr. Kuroda last month announced that the bank would seek to double Japan’s monetary base, as well as the bank’s holdings of Japanese government bonds, by the end of 2014. The aim of such a policy is to keep interest rates low, prompting consumers to spend and businesses to invest in growth and jobs.

In recent days, however, worries have grown about rising interest rates in the government bond market, which could threaten Japan’s monetary policy. Japan is vulnerable to rising borrowing costs because of its high public debt, which is twice the size of its economy. Bonds are also the main financial asset held by banks, pension funds and insurance companies, making a surge in debt yields perilous.The biggest concern for the central bank is volitility in the bond barket, where yeilds are still above levels marked befor its meeting last month, Cameron Umetsu, a strategist at UBS, said in a note published ahead the decision Wednesday.

“This can be viewed as one of the ‘unintended effects,’ which, if sustained, could dilute the effectiveness of the new quantitative and qualitative easing framework,” he said.

The scale of Japan’s quantitative easing is striking. Assuming that the Japanese economy grows by 2 percent a year, the Bank of Japan would expand its assets to just under 60 percent of the country’s gross domestic product, according to estimates from CLSA Asia-Pacific Markets. The U.S. Federal Reserve’s assets, which now total about 20 percent of the U.S. economy, and the European Central Bank’s assets, which come to about 28 percent of the euro zone’s G.D.P., pale in comparison.

Japan stands out in another important way. Under Prime Minister Shinzo Abe, who took office in December and has been the main champion of the bank’s new audacity, Japan is coupling its monetary push with heavy government spending, contrary to calls for austerity in the United States and Europe.

But in Japan, such calls have largely fallen on deaf ears; hardly two months into office, Mr. Abe pushed through an emergency stimulus package to the tune of 10 trillion yen, and the National Diet, the Japanese parliament, is expected to pass a whopping initial 92.6 trillion yen budget for 2013, with heavy spending on public works.

By contrast, the Fed and E.C.B. have been forced to depend on monetary policy alone to stave off stagnation and bring about an economic recovery. In both the United States and Europe, a significant increase in government spending remains too politically controversial.

That is not the case in Japan, where Mr. Abe’s ruling Liberal Democratic Party enjoys a solid majority in parliament’s powerful lower house, and appears set to ride sky-high opinion polls to victory in summer elections for the upper house.

Still, critics have pointed to Japan’s skyrocketing public debt as proof that such spending is hardly sustainable. Japan’s latest spending packages, they say, will be the final push that could send Japan plummeting into a Europe-like debt crisis, but of even bigger proportions.

Defenders of the bank’s monetary policy had argued that Japan’s bold stimulus efforts would not push interest rates higher, because the central bank promises to buy bonds the government issues.

But in recent days, yields have been volatile, with the key 10-year nominal government bond yield hitting five-year highs last week before later settling down. Traders blamed the central bank’s purchases for creating a lack of liquidity in bond markets.

Still, some analysts say the spike merely reflects healthy inflation expectations.

The Bank of Japan “learned is that it is not easy” to control market expectations, Masaaki Kanno, chief economist at JPMorgan Securities Japan, said in a research note.

Article source: http://www.nytimes.com/2013/05/23/business/global/japan-keeps-monetary-policy-steady.html?partner=rss&emc=rss