In an astonishing display of throwing all caution into the crematory, the new Bank of Japan Governor, Haruhiko Kuroda, pledged to inject $1.4 Trillion of stimulus into the Japanese economy in the bold move can stop Japan’s decades old deflation.
Kuroda announced this audacious move, Thursday, April 4th and Japanese markets responded by going on a financial tear. From Reuters:
Financial markets liked what they saw.
The Nikkei stock index jumped 2.2 percent, finishing just shy of a 4-1/2-year closing high, while on Wall Street, U.S.-traded shares of Toyota Motor rose 4.6 percent.
The yen fell more than 3 percent against the dollar and 4 percent against the euro, while the 10-year government bond yield hit a record low.
In an economy which is 1/3 the size of the US Economy, Kuroda’s fearless move will double the monetary base of Japan’s economy in hopes this will stoke lending and investment. And instead of focusing on interest rates, Kuroda has pledged to fine tune the Japanese economy by centering on the monetary base:
New Governor Haruhiko Kuroda committed the BOJ to open-ended asset buying and said the monetary base would nearly double to 270 trillion yen ($2.9 trillion) by the end of 2014, a dose of shock therapy officials hope will end two decades of stagnation.
The policy was viewed as a radical gamble to boost growth and lift inflation expectations and is unmatched in scope even by the U.S. Federal Reserve's own quantitative easing program.
The Fed may buy more debt, but since Japan's economy is about one-third the size of the economy, Kuroda's plan looks even bolder.
"This is an unprecedented degree of monetary easing," a smiling Kuroda told a news conference after his first policy meeting at the helm of the central bank.
"We took all available steps we can think of. I'm confident that all necessary measures to achieve 2 percent inflation in two years were taken today," he said.
One of those steps was to abandon interest rates as a target and become the only major central bank to target primarily the monetary base - the amount of cash it pumps out to the economy. It adopted a similar policy in 2001-2006, but not on this scale.
Putting this $1.4 Trillion BOJ stimulus into perspective by comparing it to the US Federal Reserve’s stimulus:
Adjusting for gross domestic product, Japan's program will be twice as large as the Fed's asset purchases, said Stephen Jen, managing partner at SLJ Macro Partners in London. "Investors were justified in feeling shocked and awed," he said.
America’s bond king, Bill Gross, adds some color commentary on this big swing for the fences:
"It may not work but they will go down swinging," added Bill Gross, founder and chief investment officer at giant bond fund PIMCO, via his Twitter account.
Stealing some notes from the US Federal Reserve game plan of Ben Bernanke, and adding some wildcat plays of his own, Kuroda has pledged to buy government bonds while adding purchases of shares of ETFs and REITs in the Nikkei.
The BOJ will buy 7.5 trillion yen of long-term government bonds per month, roughly 70 percent of bonds sold in markets. It combined two bond-buying schemes, its asset-buying and lending program and the "rinban" market operation, to buy longer-dated government bonds, including those with duration of 40 years.
The central bank will also increase purchases of exchange-traded funds (ETFs) by 1 trillion yen per year and real-estate trust funds (REITs) by 30 billion yen per year.
"I can say that the BOJ came up with a perfect answer in response to market expectations," said Junko Nishioka, chief Japan economist at RBS Securities.
"Kuroda made good on his promise of boosting monetary easing in terms of both volume and types of assets that the bank purchases."
Kuroda said the BOJ wanted to push down bond yields enough so that investors will start buying riskier assets, such as property and stocks, and to prompt households and companies to spend now rather than later on expectations of rising prices.
Will this desperate move of Kuroda’s be too much for the bond markets to absorb without jacking up long term rates? Will this huge injection of stimulus finally ignite investor confidence for riskier investments in the Japanese Nikkei? Only time will tell.
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