The Bank of Japan (BOJ) surprised global financial markets on Friday by expanding its massive stimulus spending in a stark admission that economic growth and inflation have not picked up as much as expected after a sales tax hike in April.
The jolt from the BOJ, which had been expected to maintain its level of asset purchases, came as the government signalled its readiness to ramp up spending to boost the economy and as the government pension fund, the world's largest, was set to increase purchases of domestic and foreign stocks.
BOJ Governor Haruhiko Kuroda portrayed the decision as a pre-emptive 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,’’ he told a news conference, reaffirming the BOJ’s goal of pushing consumer price inflation to 2 per cent next year.
“We are in a critical moment in the effort to break free from the deflationary mindset.’’
The BOJ’s decision stands in marked contrast with the Federal Reserve, which, on Wednesday, ended its own ‘quantitative easing’, judging that the U.S. economy had recovered enough to dispense with the emergency flood of cash into its financial system.
In a rare split decision, the BOJ’s board voted 5-4 to accelerate purchases of Japanese government bonds so that its holdings increase at an annual pace of 80 trillion yen ($723.4 billion), up by 30 trillion yen. The central bank also said it would triple its purchases of exchange-traded funds (ETFs) and real-estate investment trusts (REITs) and buy longer-dated debt, sending Tokyo shares soaring and prompting a sharp sell-off in the yen.
Economy floundering In a semi-annual report, the BOJ halved its growth forecast for the fiscal year to March to 0.5 per cent. It slightly lowered its CPI forecast for fiscal 2014 and fiscal 2015, but still expects to meet its inflation target within the two-year timeframe it originally set out.
The benchmark Nikkei stock index spiked to a 7-year high on the BOJ bombshell. It closed up 4.8 per cent, building on early gains from the news of the asset-allocation changes by the Government Pension Investment Fund.
The yen tumbled to its lowest level in nearly seven years against the dollar on Friday, putting it on track for its biggest losses in 18 months.
