The Bank of Japan (BOJ) has announced it will dramatically expand the country’s money supply, as it tries to stimulate the economy growth.
The Japanese central bank vowed to boost an asset purchase programme and meet a 2% inflation target in two years, after a two-day meeting, the first chaired by new governor Haruhiko Kuroda.
Japan’s economy, the world’s third-largest, has been battling more than a decade of falling prices.
Haruhiko Kuroda had previously said he would do “whatever it takes” to drive growth.
The Bank of Japan has announced it will dramatically expand the country’s money supply, as it tries to stimulate the economy growth
“The BOJ will conduct money-market operations so that the monetary base will increase at an annual pace of about 60 trillion yen to 70 trillion yen [$645 billion to $755 billion],” the BOJ said in a statement.
This increase in the money supply is expected to stoke inflation.
Many analysts have said that falling prices discourage people from spending, and companies from investing, and that has trapped Japan in a cycle of sluggish growth and recession.
The yen fell against the US dollar, and Tokyo’s Nikkei 225 index rose 2.2% on the central bank’s decision, indicating markets were reacting positively to the stimulus measures.
“The measures announced overall were bold, and more than what had been expected,” said Hiroshi Maeba, from UBS in Japan.
“The markets clearly saw that the BOJ did all it can at this point and responded accordingly.”
PM Shinzo Abe, who was elected last year, has been pushing for the BOJ to do more to help the economy.
His plan, a combination of big government spending as well as an aggressive central bank asset buying programme, has been dubbed Abenomics.
Haruhiko Kuroda, who was nominated by Shinzo Abe for the top job at the central bank, is seen as sharing those views, which are a departure from the BOJ’s previous stance.
On Thursday, the central bank said it would also increase its purchases of Japanese government bonds to a total of 50 ttillion yen, a move aimed at bringing down interest rates and spurring lending.
The BOJ also extended the average maturity of the bonds it purchases from three years to seven years. Finally, the bank said it would also buy relatively riskier assets such as exchange-traded funds and real estate trust funds.
The decisions passed with unanimous votes from the board of the BOJ, an indication that this would mark the beginning of Haruhiko Kuroda’s shift towards more aggressive monetary easing.
However, some observers have expressed concern that this new strategy will leave Japan, which already has the largest debt pile of any industrialized nation, even more in the red.
Haruhiko Kuroda has been nominated by Japan’s government to be the next governor of the country’s central bank.
Haruhiko Kuroda is currently the head of the Asian Development Bank and is seen as a supporter of aggressive monetary easing to help revive Japan’s economy.
The government, which recently won a general election, wants the Bank of Japan to do more to boost growth.
Both the upper and lower houses of Japan’s parliament will now need to vote and approve the nomination.
Kikuo Iwata and Bank of Japan official Hiroshi Nakaso were also nominated to serve as the central bank’s deputy governors.
Prime Minister Shinzo Abe won the general election on a platform of promises to help revive Japan’s economy, which has seen years of stagnating growth.
A more aggressive monetary policy stance by the central bank has been something that Shinzo Abe has been advocating for, citing it as key to spurring a fresh wave of economic growth.
During his election campaign Shinzo Abe had even hinted that the government may look at altering the law that ensures the central bank’s independence if it does not take adequate steps.
Although Shinzo Abe toned down his rhetoric later on, it did indicate how crucial the appointment of a new governor would be, not just to the relations between the government and the central bank, but also the BOJ’s independence going forward.
Analysts said that if Haruhiko Kuroda’s nomination is approved by the parliament, it would be a win-win situation.
“This clearly indicates that the government and the central bank will be working towards the same target and there will be an agreement on what direction the Japanese economy should take from here,” said Junko Nishioka of RBS Securities.
Junko Nishioka added that with Haruhiko Kuroda being a supporter of aggressive policies, it was unlikely that the government take the extreme step of altering the BOJ law.
“It does necessarily mean that the BOJ is not going to give up its independence,” she added.
Haruhiko Kuroda has been nominated by Japan’s government to be the next governor of the country’s central bank
Among the policies suggested by Shinzo Abe has been a call for stoking inflation as a means to boosting domestic demand.
Japan, unlike many other Asian nations, has been fighting deflation or falling consumer prices for best part of the past decade.
It has been a big hurdle in its attempts to boost domestic consumption as consumers tend to put off purchases in the hope of getting a cheaper and better deal later on.
Shinzo Abe has hinted that the central bank should print “unlimited yen” to help fight deflation and encourage price growth.
The idea being that with more money floating around, consumers will have more cash to spend and that will help drive up demand and consumer prices.
Under pressure from the government, the central bank doubled its inflation target to 2% last month, a move seen as key by many analysts to help revive domestic demand.
Haruhiko Kuroda, who is seen as a advocate of inflation target, has suggested that the central bank should try and achieve a 2% inflation rate within two years.
“Under Kuroda-san the BOJ will take a proactive approach towards achieving the inflation target,” said Junko Nishioka.
The government’s aggressive stance has resulted in a sharp decline in the yen.
The Japanese currency has dipped nearly 15% against the US dollar since November last year.
The yen fell further on Thursday, down by nearly 1% against the US dollar, after the government announced Haruhiko Kuroda as its nominee to head the central bank.