Bank Of Japan Plans Asset Purchase Programme To Curb Deflation

The Bank of Japan (BoJ) ended its two-day policy meeting yesterday (Jan 22, 2013). This meeting was closely tracked by global markets, as the recently elected administration of Prime Minister Shinzo Abe put intense pressure on the central bank to act aggressively towards spurring growth and to end the spree of falling prices.

The meeting saw a revision of the bank’s ‘price stability target’ (considering consistent deflation) from the earlier 1% increase in inflation to 2%. The adoption of this target marks a major policy change in the Japanese economy, which has been experiencing deflation for a prolonged period. Moreover, the target seems overly ambitious considering the fact that BoJ expects consumer prices to fall by 0.2% in the current fiscal year (by March 2013) and rise by a mere 0.4% next fiscal.

To achieve the targeted inflation rate, the central bank will pursue an aggressive easing programme at a virtually zero interest rate policy and through an open-ended asset purchase programme till the bank deems fit. However, the markets were disappointed about the timing of this move. The easing programme would commence in January 2014.

There were no changes made in the stimulus for 2013. In BoJ’s meeting last month, it had increased the size of asset purchases from 65 trillion yen at the end of 2012 to 101 trillion yen by the end of 2013.

BoJ Governor Masaaki Shirakawa’s term ends in less than 11 weeks. Although he has set the time for commencement of the asset purchase programme for next year, the successor is not likely to be any less aggressive. Moreover, Shirakawa has given a free hand to the potential contenders (who are likely to assume the position in the next three months) to pursue their agenda.

Any move towards boosting growth and setting inflation targets would be welcomed by the economy. Evidently, drastic steps are required to be taken to stimulate the economy that has long been in a slump, which contracted by 0.9% and 0.5% on a yearly basis in Q3 and Q2 of 2012 respectively. As for the rest of Asia, any demand growth in Japan would result in a direct upward movement in exports, thus benefiting economies. India would have a larger advantage since the recent fallout between Japan and China over the possession of disputed islands in the Pacific Ocean.

At the same time, the investment flows from Japan would have the potential to balance the outflows seen due to the retreat of European banks. It would also increase FII inflows to India, thus helping to improve market conditions. However fund flows into the Indian markets can be expected to pick up in the near-medium term, considering the time frame of the programme and the uncertainty surrounding the plan of action adopted by the potential Governor of BoJ, based on which improvement would occur to a sizeable extent in Japan. Of course, more clarity is expected 2-3 months hence, when Shirakawa’s tenure ends and the new governor sets his course of action.