A decade after Federal Reserve Chairman Ben Bernanke travelled
to Japan and preached the benefits of reflationary policy to the
Bank of Japan, it finally seems as though leaders at the Bank of
Japan are heeding his call.
With the latest moves overnight, the Bank of Japan, led by
Governor Haruhiko Kuroda, has announced staunch new easing
policies aimed at reflating the economy.
The Bank of Japan is clearly backing up the rhetoric of the
past six months with new easing measures. First of all, the Bank
of Japan is set to increase asset purchases to seven trillion
yen, or more than $73 billion, per month in bonds and will
increase the monetary base some 50 percent by this time next year
and expects to double bond holdings in two years. For comparison,
the most the Fed has increased the monetary base in one year is
about 20 percent.
However, asset purchases are just one of the many policy tools
announced overnight. The Bank of Japan first has announced that
it will extend the average maturities of its bond holdings to
seven years from three years, giving it the leeway to purchase
longer dated bonds.
Also, the Bank of Japan is switching its policy target to
targeting the size of the monetary base from targeting an
overnight borrowing rate, a very strong indication that easing
efforts will be strong.
The Bank of Japan also announced that it will merge its two
asset purchase programs into the quantitative easing to make
purchases more clear to markets. The Bank followed this by
announcing that it is temporarily suspending the Bank Note Rule,
with a view to permanently suspend the rule, and also announced
that QE will continue until inflation reaches two percent,
ideally in 2 years time.
For reference, the Bank Note Rule was a self-imposed rule on
the Bank of Japan upon its creation to make sure that the BoJ's
balance sheet did not become over-leveraged. Effectively, the
rule limits the amount of bonds the BoJ can hold to the amount of
currency in circulation. However, by abolishing the rule, the BoJ
can effectively lever itself up and buy more bonds.
The news was obviously expected by markets but nevertheless
was a strong signal that the Bank of Japan is finally ready to do
what it must to tackle deflation and spur growth in the Asian
The new combined efforts at the Bank of Japan seem like enough
to reflate the economy, but no one will know how successful the
BoJ has been in its efforts for some time. A key indication that
the BoJ is becoming effective would be to see inflation creep
higher and industry services turn more positive.
Markets saw seismic shifts on the news, especially the yen
markets. The Japanese Nikkei Index rose 2.2 percent and the
broader TOPIX Index gained a strong 2.7 percent, both moves
following near three percent gains Wednesday.
The yen declined massively against all major pairs also
overnight, dropping 2.59 percent against the dollar as the
USD/JPY rose to 95.45. Also, the AUD/JPY rose 2.14 percent to
99.441 and the EUR/JPY gained 2.28 percent to 122.27.
Also, gold priced in yen saw a sharp spike overnight. The
XAU/JPY cross popped 1.76 percent overnight to 147,505.1875 yen
and is now up over 18 percent over the past year priced in yen.
The move in gold priced in yen is just another sign of the BoJ's
efforts taking fruit.
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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