Business

Bank of Japan plans open-ended stimulus

Phillip Inman

The Bank of Japan has bowed to pressure from the new government with a plan for a bigger than expected financial stimulus

Bank of Japan Governor Masaaki Shirakawa. (AFP)

Aimed at ending two "lost" decades of economic stagnation. The Bank of Japan has bowed to pressure from the new government with a plan for a bigger than expected financial stimulus aimed at ending two "lost" decades of economic stagnation. The central bank said it would lend the Tokyo government unlimited amounts of yen when the scheme started in 2014 in the expectation it would boost the economy by redirecting bank lending to the private sector, echoing the Bank of England's £375-billion quantitative easing.

The scheme is also designed to boost inflation to 2%, after a long period of falling prices, to force down the value of the yen, making Japanese exports cheaper and relieving the pressure on manufacturing conglomerates such as Toyota and Hitachi.

The move follows weeks of speculation over the Bank of Japan's reaction to calls from the newly elected liberal government for a large stimulus to end two decades of almost zero growth – a prominent feature of the party's election campaign.

In a joint statement with the government, the central bank promised to reach the new annual inflation goal of 2% "at the earliest possible time", drawing praise from Prime Minister Shinzo Abe, who described the policy as "epoch-making".

Abe believes a higher inflation target will give the central bank more freedom to flood the financial system with a bigger injection of electronic funds.

The prime minister also plans to raise government spending on infrastructure and other projects to boost employment and wages, which have also remained static in recent years. Some economists have warned against such a spending spree when the annual deficit is already exceeding 10% of gross domestic product and the total debt pile is the largest in the developed world, at almost 250% of GDP. The decision to devise policies that depress the country's currency have also set off alarm bells that a currency war is around the corner. The head of the German central bank, Jens Weidmann, said he was concerned that the Bank of Japan was about to lead the world into a ruinous round of competitive devaluation.

Four recessions
Abe has promised to tackle domestic issues that are stalling growth, in particular the web of subsidies and regulations that discourage businesses from making new investment. But several of his predecessors made the same pledges, only to be beaten back by vociferous lobby groups.

Masaaki Shirakawa, the governor of the central bank, emphasised that the government had to do its part to boost the world's third-largest economy, which has suffered four recessions since 2000.

"Various government measures to boost Japan's competitiveness and growth potential are equally important," he said.

Japanese economists are concerned that, without some deregulation of the service sector, Japan will succumb to the challenge from South Korea and China for the technological markets it previously dominated.

The central bank has pledged to supply ¥101-trillion by the end of 2013 by buying assets and issuing loans. From 2014, it will switch to an open-ended commitment to buy assets, a move many analysts thought would come only later.

Joseph Capurso, a Sydney-based currency strategist at the Commonwealth Bank of Australia said: "They've gone further than I thought by introducing the open-ended plan. What surprises me is that they won't start until 2014. That's odd and different from what the federal reserve did, which was immediate." – © Guardian News & Media 2013

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