BoJ eases policy further in quest of 2% annual inflation

29 July 2016

Bank of Japan (BoJ) on Friday announced a further easing of monetary policy by doubling purchases of exchange-traded funds (ETF), in league with the US Fed and the Bank of England in the pursuit of 2 per cent inflation so as to spur production and investment.

The BoJ set its current inflation target in January 2013, less than a month after Prime Minister Shinzo Abe came to power with a plan to pull the economy out of two decades of stagnation.

At the two-day rate review that ended on Friday, the BoJ decided to increase ETF purchases so as to increase its total holding at an annual pace of 6 trillion yen ($58 billion), up from the current 3.3 trillion yen. The decision was made by a 7-2 vote.

BoJ, however, maintained its base money target at 80 trillion and kept the existing pace of purchasing other assets, including Japanese government bonds.

It also left the interest charged on a portion of excess reserves that financial institutions park with the central bank unchanged the 0.1 per cent.

The BoJ said it would double the size of its dollar lending programme to support growth in US dollars (the Special Rules for the US Dollar Lending Arrangement to Enhance the Fund-Provisioning Measure to Support Strengthening the Foundations for Economic Growth Conducted through the Loan Support Programme) to $24 billion (about 2.5 trillion yen) from the previous size of $12 billion. Under this lending programme, the BoJ provides its US dollar funds for a period of up to 4 years to support Japanese firms' overseas activities through financial institutions.

The dollar was down a yen on Friday at 102.825 and during trading and the Nikkei average tumbled nearly 2 per cent, after the BoJ's decision fell short of expectations.

Bank of Japan (BOJ) governor Haruhiko Kuroda said the central bank will conduct a thorough assessment of the effects of negative interest rates and its massive asset-buying programme in September, suggesting that a major overhaul of its stimulus programme may be forthcoming.

Kuroda said the bank was conducting the review not because its policy tools have been exhausted but to come up with better ways to achieve its 2 per cent target - keeping alive expectations of further monetary easing.

"I don't think we've reached the limits both in terms of the possibility of more rate cuts and increased asset purchases," Kuroda told reporters after the policy meeting.

"We will of course consider what to do in terms of monetary policy steps, based on the outcome of the assessment."

The BoJ hopes to hit the 2 per cent inflation target in fiscal 2017 and 2018, but warned that heightening uncertainties could cause delays.

Kuroda justified Friday's slight easing as aimed at preventing external headwinds, such as weak emerging market demand and Britain's vote to leave the European Union, from hurting business and household confidence.

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