The Bank of Japan (BOJ) eased monetary policy yesterday by boosting its asset purchase program, as prospects of a near-term recovery in the world’s third-largest economy faded because of weakening exports and fall-out from a territorial dispute with China.
The BOJ increased its asset buying and loan program, currently its key monetary easing tool, by ￥10 trillion (US$127 billion) to ￥80 trillion, with the increase earmarked for purchases of government bonds and treasury discount bills.
The BOJ expanded its target for purchases of government bonds and treasury discount bills by ￥5 trillion yen each, and extended the deadline for meeting the new overall target by six months to December next year.
It also scrapped a rule that limits purchases of government bonds to those yielding 0.1 percent or higher, a move aimed at smoothening fund supply as it faces growing problems forcefeeding cash to markets already awash with excess liquidity.
The announcement came a month earlier than expected and followed a promise from the US Federal Reserve to pump US$40 billion a month into the economy until the jobs market improves and new plans from the European Central Bank to fight the region’s debt crisis.
The BOJ move lifted Japanese stocks to a four-month high and the feel-good factor carried into Europe, where London, Paris and Frankfurt all opened higher after seeing falls earlier in the week.
The Nikkei 225 index at the Tokyo Stock Exchange rose 108.44 points at 9,232.21, the best finish since May 2, while the TOPIX index of all first-section issues gained 0.85 percent, or 6.44 points, at 764.80.
“It is similar to the Fed effect. Global easing of policy is positive for the market, especially for the equity market, but this is also interesting because it was sort of unexpected,” Daiwa Securities economist Tobias Blattner said.
The yen fell to a one-month low against the dollar and the euro edged up 0.13 percent to US$1.3062 on improved risk sentiment, although it was still trading nearly a full US$0.01 below a four-month high set on Monday.
A recent slew of weak data, including a slump in exports and factory output, made central bankers less convinced that global demand will soon pick up to help a recovery in the export-reliant economy.
In its assessment of the economy, the central bank said that a pick up in economic activity had paused and it removed a line from its post-decision statement forecasting a return to a moderate recovery.
“Japan’s economic indicators have been looking weak, so the BOJ’s move makes sense from that standpoint,” said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management in Tokyo. “BOJ Governor Masaaki Shirakawa had been sending messages that the BOJ won’t always do what the market expects, but I think the BOJ was a little surprised by the Fed’s launch of QE3.”
The potential economic fallout from an escalating territorial dispute with China, Japan’s biggest trading partner, has added to headaches for policymakers fretting about the damage from a strong yen and weakening global demand on exports.
Japanese Finance Minister Jun Azumi welcomed the move, saying it was bolder than expected and will have a positive impact on Japan’s economy by stabilizing currency moves.