Daily Management Review

Underwhelming Expectations, ETF Buying Doubled by BOJ in its Policy Easing Strategy


07/29/2016




Underwhelming Expectations, ETF Buying Doubled by BOJ in its Policy Easing Strategy
While disappointing investors who had set their hearts on more audacious measures but yielding to pressure from the government and financial markets for bolder action, the Bank of Japan expanded stimulus on Friday by doubling purchases of exchange-traded funds (ETF).
 
But the central bank also suggested that a major overhaul of its stimulus program may be forthcoming when it said that it will conduct a thorough assessment of the effects of negative interest rates and its massive asset-buying program.
 
The total holdings of the bank increased at an annual pace of 6 trillion yen ($58 billion), up from the current 3.3 trillion yen, after its announcement to increase ETF purchases at the two-day rate review that ended on Friday. The decision was made by a 7-2 vote.
 
In addition to the pace of purchases for other assets including Japanese government bonds, the bank also maintained its base money target at 80 trillion yen.
 
The 0.1 percent interest it charges to a portion of excess reserves financial institutions park with the central bank was also left unchanged.
 
After the BOJ's decision fell short of expectations, the Nikkei average tumbled nearly 2 percent and the dollar fell more than a full yen on Friday at one point to as low as 102.825.

"The BOJ did not live up to expectations. Increasing ETF purchases makes no contribution to achieving a 2 percent inflation. The BOJ won't admit it, but it has reached the limits of quantitative easing and negative rates," said Norio Miyagawa, senior economist at Mizuho Securities.
 
The BOJ likely aimed to maximize the effect of its measures on the world's third-biggest economy by coordinating its action with the government's promised $272 billion economic stimulus spending package. The Japanese economy is struggling to escape decades of deflation.
 
"Japan is conducting a powerful mix of flexible fiscal policy and quantitative easing. The government's stimulus package helps reinforce this drive and is timely in achieving sustainable growth with price stability," BOJ Governor Haruhiko Kuroda told a news conference after the decision.
 
In a quarterly review of its projections, the BOJ maintained its rosy inflation forecasts for fiscal 2017 and 2018. The bank warned uncertainties could cause delays even as it left intact the timeframe for hitting its price growth target.
 
"Japan's economy may see the pace of recovery slow for a while due to some weakness in exports and output. But it is then expected to continue expanding above its potential growth rate and expand moderately as a trend, with rising income driving spending among companies and households," Kuroda said.
  
The bank also attempted to stop business and house hold confidence from getting a hit by external headwinds, such as weak emerging market demand and Britain's vote to leave the European Union, which according to it justified its Friday's monetary easing.
 
But the move was largely forced by the government and markets pressures, say analysts. In the wake of Prime Minister Shinzo Abe's announcement of a bigger-than-expected 28 trillion yen stimulus package on Wednesday, Japan's economy minister lobbied for more BOJ.
 
"The BOJ seems to have had no choice but to ease policy this time as markets had factored in its fresh stimulus measures significantly. In addition to that, there seems to have been political pressure," said Tsuyoshi Ueno, senior economist at NLI Research Institute.
 
(source:www.reuters.com) 






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