The Bank of Japan scrapped a limitation on buying government bonds and ramped up its purchases of corporate debt, joining global counterparts in their unprecedented expansion of monetary stimulus as the coronavirus hammers the world economy.
The bank had come under increasing pressure to take more action as the declaration of a nationwide state of emergency this month brought more shutdowns across the country and heightened the need for financial support for struggling businesses.
The BOJ’s previous guideline on government debt was to increase holdings by around ¥80 trillion ($743 billion/Dh2.73tn) per year. Removing the guideline eliminates a possible limit on the central bank’s purchases at a time when the government will issue new bonds to fund record-breaking stimulus.
“The government and the Bank of Japan are truly strengthening policy coordination,” said Japan’s economy minister, Yasutoshi Nishimura.
Still, it remains in question how Monday’s move will actually change the BOJ’s bond purchases as the central bank hasn’t bought at a pace anywhere near that level in recent years. The current yield curve control programme does not require a surge in purchases as long as 10-year bond yields stay around zero per cent.
The central bank also increased its scope for buying corporate bond and commercial paper by more than doubling its ceiling on holdings to ¥20tn. It also expanded access to its emergency loan programme to a wider range of banks and projected inflation as low as -0.7 per cent in the 12 months to March 2021, according to its statement and outlook.
With the extra measures focused largely on supporting struggling companies with financing, the bank kept its short- and long-term interest rate targets unchanged. A return to relative stability in stock markets and reduced concern over the possibility of an abrupt yen appreciation have given the BOJ some breathing space to leave its main interest rate policy levers untouched.
Market reaction was mixed. The Nikkei 225 stock index rose in the afternoon session while the yen strengthened against the dollar to as low as 107.21 from around 107.48 immediately beforehand, suggesting some disappointment at the overall scale of action.
Some economists saw the ditching of the largely symbolic guideline as a further sign of the BOJ’s limited policy firepower beyond its assistance to help corporate financing.
“The BOJ strengthened its policy in line with expectations, but it failed to go beyond expectations. That shows the BOJ has been running out of ammunition, and it’s getting harder for the BOJ to create fresh measures,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute and a former Bank of Japan official.
The additional measures announced by governor Haruhiko Kuroda’s board also show a greater degree of fiscal-monetary policy coordination, with Prime Minister Shinzo Abe unveiling more than $1tn (Dh3.67tn) in stimulus this month and an accompanying plan to issue more bonds.
The BOJ also likely saw a need to take action before the Fed and the European Central Bank meet later this week, so as not to be seen lagging the bold moves of its peers.
Economists said ahead of the decision that with other central banks due to meet, the BOJ likely didn’t want to appear to be doing too little, too late.
For BOJ officials, memories are still fresh of being criticised for failing to act enough during the financial crisis and causing the yen to strengthen, which eventually led to the leadership change that brought Mr Kuroda to the helm in 2013.
Monday’s decision signals that the BOJ’s concern over the pandemic has intensified quickly. Unlimited bond buying was not an ideal option to take, in the view of some officials, as it further narrows bank’s policy choices at a time of heightened uncertainty, sources told Bloomberg earlier this month.
In its quarterly outlook report, the BOJ made sweeping downgrades across projection years through March 2023, forecasting a contraction of up to 5 per cent this fiscal year. It predicted inflation to be as weak as 0.4 per cent at the end of the forecast period, dashing hopes that Japan might reach the bank’s 2 per cent price target before Mr Kuroda is due to step down that April.
“The measures will allow the central bank to do more to prop up Japan Inc. and support fiscal stimulus. The primary objective appears to be to provide sufficient assistance to head off any surge in bankruptcies that could cripple longer-term prospects. The reflation effort is now on hold," Yuki Masujima, a Bloomberg economist said.