BoJ accelerates monetary expansion as Japan’s inflation slows

The Bank of Japan today announced a further easing of monetary policy by allowing the monetary base to increase roughly by $715 billion (up from the $625 billion targeted earlier) through government bond purchases and extended maturities.

"The bank will conduct money market operations so that the monetary base will increase at an annual pace of about ¥80 trillion," the BoJ said, raising the amount from the previous target of about ¥60 to ¥70 trillion.

BoJ's move comes after its already massive stimulus spending failed to impact economic growth and inflation as much as expected, after a sales tax hike in April.

BoJ governor Haruhiko Kuroda said the additional easing under the current policy framework, decided by a 5-to-4 vote, was more of a preemptive strike to keep policy on track, rather than an admission that his plan to reflate the long moribund-economy had derailed.

"We decided to expand the quantitative and qualitative easing to ensure the early achievement of our price target," Kuroda told a news conference, reaffirming the BOJ's goal of pushing consumer price inflation to 2 per cent next year.

"Now is a critical moment for Japan to emerge from deflation. Today's step shows our unwavering determination to end deflation."

Board members Yoshihisa Morimoto, Koji Ishida, Takehiro Sato and Takahide Kiuchi voted against the action. The BoJ will also increase its purchases of Japanese government bonds to about ¥80 trillion at an annual pace form about ¥50 trillion previously.

The average remaining maturity of the bank's JGB buying will now be extended to about seven to 10 years from about seven years. The bank's JGB holdings are now estimated to rise to ¥200 trillion at the end of 2014 from ¥142 trillion at the end of 2013.

The board also decided to increase its investment in risk assets. It will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will rise at an annual pace of about ¥3 trillion and ¥90 billion, triple compared to the previous targets. It will add ETFs that track the JPX-Nikkei Index 400 to its shopping list. Under the current easing framework aimed at anchoring 2 per cent inflation in about two years from April 2013.

"Japan's economy has continued to recover moderately as a trend and is expected to continue growing at a pace above its potential," the BoJ said after today's meeting. "However, on the price front, somewhat weak developments in demand following the consumption tax hike and a substantial decline in crude oil prices have been exerting downward pressure recently."

The BoJ's move comes after the US Federal Reserve on Wednesday ended its "quantitative easing," stating that the US economy had recovered enough to halt the flood of cash into its financial system.

Some economists wonder if pushing even more money into the financial system would be effective as long as consumer confidence continues to worsen and demand remains weak.