Economic waters stirred as Reserve sets steady course

Glenn Stevens' reappointment suggests a succession plan is in place, writes Gareth Hutchens.

The sharemarket lost more ground this week, for the fourth week in a row, during a big few days of central bank announcements.

For the week, the S&P/ASX200 fell 75.1 points, or 1.5 per cent, to 4891.4 points, while the All Ordinaries lost 80.6 points, or 1.6 per cent, to 4899.2 points.

The top of the week was focused on Europe and the problems of Cyprus, then softer than expected US manufacturing data for March also weighed on Wall Street.

Locally, federal Treasurer Wayne Swan extended the term of Reserve Bank governor Glenn Stevens by another three years.

His term was due to expire in September, in the month of the federal election, but it will now expire in September 2016, as he requested.

The move was seen as a sign that a succession plan has been put in train at the RBA. It is widely expected that deputy governor Dr Philip Lowe will replace Mr Stevens.

Then on Thursday, the Bank of Japan announced a huge asset purchase program in a bid to jolt its depressed economy back to life.

Its central bank said it would double its monthly bond purchases - to spend seven trillion yen a month ($69.88 billion) - in a bid to double the amount of money in its economy by the end of next year.

It hopes to achieve 2 per cent inflation by the end of next year. (The 2 per cent target is significant. It has only been above that level twice in the last 20 years - in 1998 and in 2008). The program was welcomed by economists and strategists. For 10 years Japan has struggled with persistent deflation - with depressed wages, profits and spending - with total CPI averaging -0.1 per cent a year.

It was the first decision of the bank's new governor Haruhiko Kuroda, and was taken as a sign of his strong desire to bring the economy back to life.

"We've essentially had 20 years of Bank of Japan easing that has been derided as pushing on a string," Westpac's senior currency strategist Sean Callow said.

"And it is possible that that is still what happens ... but the Japanese stockmarket and currency in particular have responded with great optimism, and that's very important.

"I did a calculation yesterday.

"The scale of their quantitative easing program is about twice as large on a monthly basis as the US Fed's current rate, when you adjust for GDP, so it's massive".

Not everyone was convinced the policy would work. "Monetarism has crawled, zombie like, from the economic grave," UBS deputy head of global economics Paul Donovan wrote in a note to clients.

"Japan has adopted the policy of the economic un-dead, declaring it will target base money rather than interest rates. Good news - the Bank of Japan has influence over base money. Bad news - base money has little influence over the economy."

The dollar moved sharply against the yen, pushing past 100 yen for the first time since August 2008.

On Friday, a sharp fall in the value of the yen pushed the dollar lower against the greenback.

Commonwealth Bank currency strategist Peter Dragicevich said news of Japan's massive quantitative easing program had boosted the US dollar against all major currencies since Thursday afternoon.