After pushing its interest rates to the boundaries at less than .10% last month, the Bank of Japan (BOJ) recently revealed new tricks up its sleeves to help boost the Japanese economy. At their meeting yesterday, the BOJ members provided additional information on their asset purchase program.
A few weeks ago, the BOJ announced a budget of 5 trillion JPY to buy more assets. This time around, it not only added 30 trillion JPY for the purchase of fixed-rate funds-supplying operation against pooled collateral, it also added details to the original plan. Apparently, a maximum outstanding amount for each purchased asset is set for the 5 trillion JPY figure:
Whew! This is definitely not your ordinary shopping list! Let me break down all these fancy-schmancy acronyms for you. JGBs stands for Japanese government bonds, or debt issued by the government itself. Treasury discount bills are government securities that have a maturity of less than 12 months. Commercial paper and corporate bonds are debt securities issued by private corporations.
ETFs, or exchange-traded funds, are investment funds traded on stock exchanges and may be comprised of stocks, commodities, or bonds. And J-REITs, or Japanese real estate investment trusts, are securities that invest directly in real estate and are also traded through exchanges.
To push through with its asset purchase plans, the BOJ is willing to purchase lower-rated corporate debt. This means it will be accommodating corporate bonds rated BBB or higher and commercial paper rated A-2 or higher, a change from the bonds rated A or higher and commercial paper rated a-1 or higher that it was formerly restricted to.
Whoa, whoa, whoa! What’s this? Why is the BOJ lowering the bar for the corporate debt it will be buying?!
Well as you know, interest rates are currently between 0% and 0.1% in Japan, which is already about as low as they can get. That being said, the central bank thinks that by purchasing riskier, lower-rated debt, it can decrease risk premiums and ultimately push borrowing costs further down. In turn, this should encourage business activity as funds become more available to business and consumers.
According to my dawgs at the BOJ, they’ll get the new fund rolling as soon as they complete all necessary arrangements. They believe the 5 trillion JPY worth of purchases should be completed by the time 2011 wraps up.
Desperate times call for desperate measures, so they say. By the looks of it, the BOJ is really feeling the pressure to stimulate its economy and is doing everything in its power to get the job done. It has bent over backwards to accommodate additional asset purchases and to lower the standards on its debt-buying, but will these measures do the trick?
Bear in mind that the BOJ also downgraded its growth forecasts for the next few years. They now estimate that the Japanese economy will expand by 1.8% in 2012, a step down from the initial prediction of 1.9% growth. Many analysts are saying that this revised forecast is a tad too optimistic, but it looks like the BOJ is really hopeful that its stimulus measures will work sooner or later.