Kuroda Launches Fresh Salvo in Effort to Stimulate Economy

The Bank of Japan’s October 31 surprise announcement of a fresh round of quantitative easing comes at a crucial time in Prime Minister Abe Shinzō’s bid to revive the Japanese economy through his Abenomics policies. Japan’s economic growth has stagnated since the government moved in April 2014 to increase the consumption tax by three points to 8%. Allowing the economy to remain flat would seriously threaten the prime minister’s goal of breaking Japan out of its deflationary environment. The unexpected timing of the central bank’s announcement drove up stock prices and pushed the yen lower. However, it is unclear how these effects will influence Abe’s pending decision on raising the consumption tax to 10%, effective from October 2015.

Nikkei Climbs to Seven-Year High

Japanese markets woke from their long slumber in the week following the BOJ announcement. On November 5, the 225-issue Nikkei average topped a five-day climb, reaching the 17,000 mark for the first time in seven years. Foreign exchange markets saw the yen fall to 114 against the dollar, its lowest level in over six and a half years. Analysts anticipate these trends will continue for the remainder of the year.

The positive impact on markets can be mainly attributed to the surprise effect of the October 31 BOJ announcement. Looking at details, the central bank is aiming to boost stagnant prices by increasing the monetary base target by an additional ¥10 trillion–¥20 trillion, bringing its total monetary policy level to ¥80 trillion. It will also expand its annual purchasing of long-term government bonds by ¥30 trillion, raising it to ¥80 trillion. Finally, the central bank will triple its purchases of exchange-traded funds and real estate investment trusts.

The BOJ announcement followed closely on the heels of a statement by the US Federal Reserve Board’s Federal Open Market Committee laying out plans for the FRB to end its quantitative easing program. The two announcements combined to trigger an influx of buying, centered mostly on overseas speculators. Within Japan, the Government Pension Investment Fund revealed on the same day as the BOJ announcement its plans to reduce domestic bond holdings and raise purchasing targets for Japanese and overseas equities.

Taken as a whole, the three announcements worked to jolt markets, boosting stock prices and driving down the yen. Although each appeared on the surface to have been made independently, many market experts suspect their timing was part of a deliberate, coordinated effort.

Top Priority: The 2% Inflationary Target

Shortly after Kuroda Haruhiko was appointed BOJ governor, he moved to initiate a then unfamiliar program of quantitative easing. The large-scale program successfully stimulated markets, earning it the moniker “Kuroda bazooka.” Staying true to its name, the sudden announcement of a second round of easing has again blasted the markets.

Kuroda has repeatedly justified further easing measures, saying, “The economy is on the brink of breaking out of its deflationary trend and we must do all we can to ensure consumer prices reach targeted levels.” When he first took the BOJ helm, Kuroda set a target of raising consumer prices by 2% over the next two years. Abe’s central policy theme of breaking Japan out of its deflationary environment is dependent on the realization of this inflationary goal. Kuroda’s success in this endeavor will undoubtedly determine his effectiveness as governor.

Narrow Approval of Stimulus Measures

One significant note in the BOJ’s decision is the narrow margin by which the central bank’s inflation-boosting measures were approved. The vote by the BOJ policy board, which consists of the governor, two deputy governors, and six board members, ended 5–4 in favor of further easing. Two of the six private-sector board members joined the governor and deputy governors in approving the plan, giving the motion a mere single-vote majority.

It is unusual for BOJ policy to pass on such a slim margin, which speaks to the broad difference in thinking among board members concerning further stimulus. The dissenters expressed concern over potential side effects arising from additional easing measures.

The economic scenario forwarded by Abenomics is based on the three arrows of bold monetary relaxation, flexible application of financial stimulus, and growth strategies. In theory, the combined effects of these policies should rejuvenate the economy by establishing a favorable economic cycle whereby improved corporate incomes drive up wages and employment, which in turn boost consumer spending. While monetary relaxation has lifted market expectations, economists in the private sector are divided over potential risks posed to the economy by negative knock-on effects of the stimulus package.

No Relation to the Pending Tax Decision

The BOJ’s move has been welcomed by many cabinet and ruling party members, such as Finance Minister Asō Tarō, who lauded the measures as providing a needed boost to the economy. Kuroda has been quick to refute accusations that the BOJ is trying to create an atmosphere favorable to government plans to raise the consumption tax in October 2015 by a further two points to 10%.

The tax debate continues to build as Abe gears up for a final decision on the issue. The prime minister will undoubtedly base his verdict on GDP figures for the July–September period. The much-awaited first preliminary results are scheduled for November 17, with second preliminary results to be announced on December 8.

(Banner photo: Bank of Japan Governor Kuroda Haruhiko announces further quantitative easing measures at a press conference on October 31. © Xinhua/AFLO.)