Last Friday the central bank announced that it would buy an additional 10 trillion JPY worth of Japanese government bonds and increase its purchases of higher-yielding assets like exchange-traded funds (ETFs) and Japanese real estate investment funds (J-REITS) by 200 billion JPY and 100 billion JPY respectively. In addition, the BOJ also extended the target maturity of the bonds it’s purchasing from two to three years.
The yen initially plunged across the board, as the 10 trillion JPY increase in bond purchases is more than the 5 trillion JPY consensus and suggested that the BOJ is committed to hitting the 1% inflation target it had announced back in February. USD/JPY even reached the 81.50 area just minutes after the release!
Surprisingly, the yen’s price action did a 180-degree turn in the later trading sessions. While some attribute the occurrence to profit-taking ahead of Japan’s Golden Week festivities, others believe that the BOJ might have disappointed market expectations after all.
You see, the BOJ also cut the funds of a separate bank lending program by 5 trillion JPY, pulling the net change in bond purchases down to just 5 trillion JPY. For many analysts, this is simply not enough to pull the economy from deflation. Just ask Finance Minister Jun Azumi, who expressed his hopes for the central bank to continue its “bold easing steps.”
Even the BOJ recognized that it’s not meeting its goals anytime soon. In its semi-annual outlook report the central bank printed that it only expects inflation to hit its 1% target by 2014. However, BOJ Governor Masaaki Shirakawa defended that it takes time to see the impact of monetary easing, and that “recklessly easing without taking into account the lag effect would destabilize price moves.”
Word on the streets is that the BOJ’s decision was influenced more by politics than economics. Recall that the central bank faced huge pressure from local politicians and investors to do more to lift the economy from deflation. Some say that by at least doing something this month, the BOJ is buying itself more time to study its next steps.
Now that the BOJ has temporarily warded off its guard dogs, one can only guess when it will ease its monetary policy next. Luckily, we do have some clues. First, we know that the BOJ is fairly susceptible to political pressure. If we hear calls for more action from Japan’s local politicians or foreign investors, then we might hear talks of more easing from the BOJ.
Japan’s economic indicators is another good place to look. Economic reports from Japan have been showing mixed signals lately, but the BOJ might be prompted to act sooner if the reports start to consistently disappoint expectations. Lastly, we can also watch the yen pairs closely. Since Japan’s GDP is highly dependent on its exports, a strong yen could drive the BOJ to implement more monetary easing.
Pulling an economy from more than a decade-long period of deflation is no easy task for any central bank. The BOJ, in particular, has a long uphill road ahead of it before it meets its inflation and economic growth targets. But if it starts making decisions based on all kinds of pressure, then it wouldn’t take long before investors start to lose confidence in the central bank’s ability to make decisions and stick to its guns.