March 28, 2024

Japan Initiates a Bold Bid to End Falling Prices

TOKYO — In its first policy steps under its new governor, Haruhiko Kuroda, the Bank of Japan announced Thursday it would seek to double the amount of money in circulation over two years, initiating a bold bid to end years of falling prices and dispelling market fears that Mr. Kuroda might fail to follow up his recent tough talk with concrete action.

The central bank said it would aggressively buy longer-term bonds and double its holdings of government bonds in two years, in effect doubling the money in circulation in the process. The bank will aim for a robust 2 percent rate of inflation “at the earliest possible time,” it said.

“This is monetary easing in an entirely new dimension,” Mr. Kuroda said following the bank’s decision.

The dramatic turn in Japanese monetary policy could open up a new chapter in the country’s economic history, for years defined by what critics said was a halfhearted battle to end deflation — the damaging fall in prices, profits and wages that has weighed on its economic growth.

The Japanese stock market reacted enthusiastically, with the Nikkei 225-share index finishing the day 2.2 percent higher.

Prime Minister Shinzo Abe, who took office in late December, has made beating deflation a central facet of his economic policy, and has already arm-wrestled the bank into committing to a target of 2 percent inflation.

So relentless was that pressure that the bank’s previous governor, the moderate Masaaki Shirakawa, resigned weeks before the end of his term, giving way to Mr. Kuroda, who shares Mr. Abe’s monetary fervor.

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 did not rise as expected, he “would not hesitate” to step up the bank’s easing program, Mr. Kuroda said. That represent a sea change from his predecessors, who were faulted for being too ready to pull back at the first sign of higher prices for fear of runaway inflation.

The Japanese financial markets appeared to give a collective sigh of relief, with their rise in recent months seemingly justified by Mr. Kuroda’s strong positioning. Japanese stocks have soared in anticipation of a reversal in monetary policy under Mr. Abe, fanned higher by recent assurances from Mr. Kuroda that he would do “whatever it takes” to defeat deflation.

But in recent days, the stock market had pulled back as jittery investors wondered whether Mr. Kuroda could make good on his promises. Shortly after the bank’s announcement, the benchmark Nikkei index jumped from negative territory. The yen weakened to ¥95.40 to the dollar early evening in Tokyo from about ¥93 before the announcement.

“Kuroda did it,” Masaaki Kanno, an economist at JPMorgan Securities Japan, said in a note to clients. “This is a historical change in the B.O.J.’s policy..”

In a statement detailing the new measures, the central bank said it would buy longer-term government bonds, lengthening the average maturity of its holdings to seven years from three years and expanding Japan’s monetary base to ¥270 trillion by March 2015. Under that plan, the bank will buy ¥7 trillion of bonds each month, equivalent to over 1 percent of its gross domestic product — almost twice the pace of the U.S. Federal Reserve.

The policies are part of a new asset purchase framework that focuses on the monetary base instead of the overnight interest rate, which has remained close to zero for years doing little to increase prices or otherwise help the real economy. The bank will also consolidate all its purchases in a single operation in an attempt to improve transparency of the bank’s purchases.

Mr. Kuroda said that the bank would suspend a longstanding rule that limits its bondholdings to the amount of money in circulation — and he pointed out that limit had already been surpassed.

Some economists caution that the central bank’s huge purchases of government debt could eventually be seen by investors as enabling runaway public spending, quashing confidence that Japan will ever pare down its already sky-high public debt and driving 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,” warned Ryutaro Kono, a Japan economist at BNP Paribas.

Others argue that rising prices, once stoked, could be hard to control, a warning rooted in Japan’s “bubble economy” of the 1980s, and its subsequent painful collapse.

Some experts also question whether monetary policy alone can end deflation in Japan, which suffers from other deflationary pressures, like a shrinking and aging population, and cumbersome regulations that make the economy inefficient. They charge that despite the easy money already available in Japan, lending has not increased dramatically because businesses and consumers see little potential for growth.

Mr. Kuroda said that risks or doubts should not hold the central bank back from fighting deflation. “We have debated the side effects, but we are currently not concerned that long-term interest rates might spike, or conversely, that there would be an asset bubble,” Mr. Kuroda said. “That risks exist should not hold us back from pursuing much-needed monetary easing. We will keep in mind those risks, but push ahead.”

He also said that once Japan had fought off deflation and reignited its economy, lending would surely follow, spurring more economic growth in a virtuous cycle. “We are already seeing an improvement in sentiment among consumers and companies,” he said. “As the economy expands and prices rise, lending will also grow.”

Mr. Kuroda acknowledged that Japan’s new monetary push is weakening the yen, which bolsters Japan’s exporters at the expense of overseas rivals — a sticking point between Tokyo and its trading partners. But he declined to comment further, saying currencies were beyond his mandate as central bank governor.

Government officials welcomed the bank’s decision. “The bold monetary easing steps go beyond expectations,” Economy Minister Akira Amari said. “The Bank of Japan is finally steering Japan toward rising prices.”

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