Japan acts, investors left deflated
THE Bank of Japan has adopted a 2 per cent inflation target demanded by the country's new government while launching an open-ended easing policy in its strongest commitment yet to ending two decades of deflation.
The moves - set out in a rare joint statement with the government - follow stern calls from the new administration for Japan's central bank to become more aggressive in kickstarting the anaemic economy.
It also raised its economic growth forecast for the fiscal year to March 2014 to 2.3 per cent from a previous 1.6 per cent estimate, and held interest rates at zero to 0.1 per cent.
Japan's new Prime Minister, Shinzo Abe, hailed the Bank of Japan's statement as an "epoch-making" policy shift.
But investors were unimpressed with the broadly expected announcement - the Nikkei stock index fell 0.44 per cent in the afternoon despite an initial surge, and the yen climbed against the US dollar and the euro. The Australian sharemarket closed up 1.6 points to 4779.1, reflecting a muted response to the central bank's statement.
The yen has been in a steep decline for weeks as markets bet the Bank of Japan would inflate its ¥101 trillion ($1.07 trillion) asset-buying program, its main policy tool. "The bank will introduce a method of purchasing a certain amount of financial assets every month without setting any termination date," it said on Tuesday.
The Australian dollar fluctuated after the statement, spiking against the yen before falling and returning to ¥94.178 about 5pm on Tuesday, almost the same level as a day before.
The Bank of Japan's asset purchases usually come with a fixed expiry date, but the new program would see ¥13 trillion in monthly purchases "for some time" from its launch next year, it said. The policy is similar to the US Federal Reserve's unlimited monthly bond-buying program - "quantitative easing" - unveiled in September.
Analysts said any efforts by Japan, the world's third largest economy and Australia's second-largest trading partner, to increase domestic growth would have a positive impact on the Asia-Pacific region, including Australia.
But in the short term, the central bank's statement and actions were not expected to have much effect on the Australian economy.
"We're sceptical about whether such action will ultimately prove successful, given the entrenched long-term deflation trend in Japan," said the Commonwealth Bank interest rate strategist Alex Stanley. He expected the yen to stay weak for now.
Arab Bank Australia treasury dealer David Scutt said there would have been disappointment that the Bank of Japan was not more aggressive on the inflation front.
"[Analysts] were looking for them to do a 2 per cent near-term inflation goal, yet all of their core CPI forecasts for 2013 and 2014 are less than 1 per cent," he said.
"Once [BoJ governor Masaaki] Shirakawa's tenure comes to an end in April and presuming that Abe puts in a very pro-government BoJ governor, I suggest that what we are seeing will not necessarily be what occurs."