Japan acts, investors left deflated
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 it was one 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 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.
"It's more of the same, it's more of the underwhelming policy response that we've seen for years and years. 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."
Frequently Asked Questions about this Article…
The Bank of Japan announced a shift to a 2% inflation target and launched an open-ended easing policy, promising to buy a set amount of financial assets each month without a termination date. For investors, the 2% target signals a stronger commitment to ending two decades of deflation and could influence currency, bond and equity markets as Japan tries to boost domestic growth.
Market response was muted and mixed: the Nikkei initially surged but then fell about 0.44%, the yen climbed against the US dollar and euro after the announcement, and the Australian sharemarket closed almost flat, up 1.6 points to 4,779.1. The Australian dollar fluctuated versus the yen and was around ¥94.178 by about 5pm.
Open-ended quantitative easing means the central bank will purchase a set amount of assets every month without specifying an end date. The BoJ said it would buy ¥13 trillion a month 'for some time' from launch next year. This approach is similar to the US Federal Reserve’s unlimited monthly bond-buying program (quantitative easing) unveiled earlier, where purchases are carried out on an ongoing basis to support the economy.
The article reports mixed short-term moves: the yen had been in a steep decline as markets expected bigger asset purchases, but it climbed against major currencies after the BoJ statement. Analysts such as Commonwealth Bank strategist Alex Stanley expected the yen to stay weak 'for now,' so investors should expect continued volatility rather than a clear one-way move.
Analysts in the article said efforts to increase Japan’s domestic growth would likely have a positive impact on the Asia-Pacific region, including Australia, because Japan is a major regional economy and a key trading partner. However, the statement also noted that in the short term the BoJ’s actions were not expected to have a large effect on the Australian economy.
Investors and some analysts were underwhelmed because the move was broadly expected and not seen as aggressive enough on near-term inflation. Arab Bank Australia and other commentators noted that core CPI forecasts for 2013 and 2014 were still below 1%, so the 2% goal looked ambitious without stronger near-term measures.
The BoJ said it would introduce a method of purchasing a certain amount of financial assets every month without setting any termination date. The new program would see ¥13 trillion in monthly purchases 'for some time' from its launch next year, adding to its existing ¥101 trillion asset-buying framework.
The article notes that BoJ governor Masaaki Shirakawa’s tenure ends in April and suggests that if Prime Minister Shinzo Abe appoints a more pro-government governor, policy could shift further. Some commentators implied the current measures might not be the final form of Japan’s approach to tackling deflation.
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