Japan Monetary Policy


Kuroda unveils unprecedented quantitative easing program

At its 3-4 April monetary policy meeting, the Bank of Japan (BoJ) launched the world's most aggressive easing program, which aims at ending the chronic deflation that has crippled economic growth for decades. The newly appointed BoJ Governor Haruhiko Kuroda announced a plan of "quantitative and qualitative monetary easing", in order to achieve an inflation target of 2% in about two years. Aggressive monetary easing is a defining element of Prime Minister Shinzo Abe's "three arrows" strategy, a set of policies that aim to end economic stagnation.

The "quantitative and qualitative monetary easing" stance includes switching the main target for market operations from the uncollateralized overnight call rate to the monetary base - cash in circulation and deposits of financial institutions at the Central Bank. In this regard, the Bank will conduct money market operations to double the size of the monetary base from the current JPY 138 trillion (USD 1.5 trillion) in the fiscal year (FY) 2012 to an estimated JPY 270 trillion (USD 2.8 trillion) by the end of FY 2014.

In addition, the Central Bank announced that it will increase purchases of Japanese government bonds of all maturities, exchange-traded funds and real-estate investment trusts. These operations will bring the total assets of the Bank to JPY 290 trillion (USD 3.0 trillion) by the end of FY 2014, well above the JPY 158 trillion (USD 1.7 trillion) in stock in FY 2012.

According to the new scheme, the BoJ will purchase about JPY 7.5 trillion (USD 76 billion) in Japanese bonds per month. The figure is slightly below the Federal Reserve's quantitative easing program in nominal terms, but as Japan's economy is only about one-third the size of the United States, the Japanese monetary easing program has become the world's largest in terms of percentage of GDP.

As a result of the new program, the Asset Purchase Program approved by the BoJ on October 2010 will be terminated, and the so-called banknote principle - which requires the BoJ not to hold government bonds worth more than the value of bank notes in circulation - will be temporarily suspended. Moreover, Governor Kuroda stressed that the new approach will be maintained as long as it is deemed necessary to reach the 2% inflation goal.

Although the announcement was broadly welcomed by the market, some analysts pointed out that the program may help the government finance its budget deficit and, given the massive levels of public debt, it may pose important risks to the country's public finances if borrowing costs start to rise as a result of higher inflation expectations.

A majority of FocusEconomics Consensus Forecasts panellists expect the collateralized overnight call rate to remain unchanged at around 0% to 0.1% this year and next.

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