3 Reasons Why the BOJ Is Very, Very Worried

Last week, market players had already expected that the BOJ would expand its asset purchases by 5 trillion JPY to stimulate the economy. What they didn’t expect was that the central bank would add twice as much to its easing program.

This brought the total amount of existing asset purchases to 80 trillion JPY, with the deadline extended from June to December 2013. The central bank also removed the minimum bidding yield, which was at 0.1%.

So what has gotten the central bank worried this time? Here are three possible reasons.

1. Grim prospects for global and domestic economy

In their latest meeting minutes, BOJ officials said that the overseas economies “have not emerged from a deceleration phase.” More specifically, it mentioned that the U.S. is struggling with low business sentiment and sluggish housing market while the euro zone is dealing with low export and local demand, as well as weakening household and business sentiment.

Meanwhile, financial problems such as the European debt crisis and the looming U.S. fiscal cliff also pose uncertainties for Japan.

As for their domestic economy, they did note some improvements in investment, particularly in construction and among businesses. However, it also cautioned that growth in exports, one of Japan’s major sources of economic activity, has moderated.

2. Persistent yen strength

Another factor that’s currently troubling BOJ policymakers is the Japanese yen’s recent rallies, which is hurting their country’s exports. Risk aversion, combined with the Fed’s QE3 announcement a few days back, has pushed traders to buy up the lower-yielding Japanese currency.

However, BOJ policymakers didn’t exactly specify any steps to keep the yen from climbing further. It doesn’t help that Finance Minister Jun Azumi just abandoned his post, adding to the uncertainty and lack of concrete action when it comes to curbing yen strength.

3. Long battle with deflation

During their latest monetary policy meeting, a BOJ official reminded the rest of the policymakers that the Japanese economy has been battling deflation for quite a while already. He noted that deflation remains a persistent threat despite the BOJ’s monetary policy easing decisions over the past couple of years.

Other members echoed this sentiment as they believed that the central bank should be able to do something to push price levels up by at least 1% in 2013. One way to do this would be to introduce further easing measures down the line.

For now, it looks like the BOJ still has a couple of tricks up its sleeve, and policymakers probably wouldn’t hesitate to use them if the economic situation calls for it. Let’s wait and see what happens during their next policy statement!

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