Foreign exchange specialists and economists in the region have expressed blatant disappointment at the Japanese central bank’s announced open-ended asset purchasing programme (APP) put in place to meet a 2% medium-term inflation target. More concrete solutions must be enacted to fight chronic deflation, they say, calling for action similar to the US’ quantitative easing 3 (QE3) measures.
“I think Japan needs to emulate the level of easing that the US has introduced,” said Mitul Kotecha, head of global foreign exchange (FX) strategy at Crédit Agricole. “Japan has got a bigger problem than other major economies in that it suffers from persistent deflation pressure. Consequently the BoJ’s policy measures have to be more aggressive than have been introduced elsewhere and so far that has not been the case. Most definitely the size of expansion needs to be much more dramatic.”
The analysis comes a day after the BoJ succumbed to pressure by newly elected prime minister Shinzo Abe to double the country’s official inflation target to 2% as well as broaden its existing APP to become open-ended.
Abe, speaking to media at the BoJ’s first policy meeting since his December 26 inauguration - serving as a barometer of the central bank’s cooperation level with the new government – said the central bank’s announcement is a “bold review of monetary policy”, while political analysts deemed the move as the central bank’s strongest stance against stagnation for at least 20 years.
Yet market participants still believe the measures fall flat. While the BoJ technically classified the APP open-ended, the central bank said that it would continue with its existing ¥101 trillion (US$1.13 trillion) purchasing scheme through the remainder of 2013, with the open-ended portion of the plan coming next year. The central bank did not elaborate on what that strategy would look like.
Further, the BoJ outlined that it would purchase approximately ¥12 trillion of assets each month from 2014, yet subtracting the amount of debt due to mature – which would be naturally reinvested - this increase amounts to just ¥10 trillion more in spending in 2014.
“The announcement really doesn’t amount to so much and we can’t really call this a very bold monetary action – ¥10 trillion more for 2014 isn’t very much,” said a Tokyo-based economist. “The good thing is that the BoJ has taken a step towards a new type of more meaningful easing, but the BoJ will need to take additional action for the market to have confidence in its ability to weaken the yen and meet its inflation target.”
On January 22, the day of the BoJ’s announcement, the yen bucked its recent depreciation trend against the dollar to appreciate at the highest rate in eight months to ¥88.36, rising from ¥90.25 on January 21 - the lowest level against the US dollar since June 2010. Likewise, the Nikkei posted a 0.4% loss.
Bankers who spoke with Asiamoney PLUS were reluctant to estimate exactly how much cash the BoJ should flush into the system through its APP, but they overwhelming said that they would have been satisfied to hear the BoJ adopting a strategy more akin to the US’ QE scheme, which has succeeded in pumping trillions of dollars into the global financial system since QE1’s November 2008 launch.
As of January 2013, US dollar M2 – a measure of money supply - is approximately US$10.5 trillion. This compares to the less than US$7.5 trillion in January 2008.
Bankers reason that in order for the yen to depreciate against the US dollar, Japan would need to print cash at a competitive rate to the US.
“A simple way to look at it is that Japan needs to print more than the Federal Reserve,” explained one FX trader. “Right now the US is trying to ease its own currency, so as they print more Japan has to keep up to see real depreciation results. The Fed has had a much larger and much more aggressive easing policy than the BoJ for a longer amount of time, so Japan’s central bank can feasibly print a whole lot more money.”
Since November, the combination of the BoJ’s existing APP – which was expanded in December - and Abe’s use of inflation as a key platform for his prime minister campaign has caused the yen to weaken about 10% to the dollar. But much more is needed for the country’s exporters and manufacturers to benefit from a weaker currency.
But passive policy in recent decades has put Japan at a disadvantage, thus making it even more important that the central bank adopts an aggressive policy now.
“I’ve looked at [central bank] balance sheet expansion since the beginning of 2007 and what’s very clear is that the relative size of balance sheet expansion by the Bank of Japan has lagged behind the other central banks,” said Kotecha. “Japan has a long way away to catch up and this is a problem. You have to look at all the measures not in isolation but in relative terms, and from that point of view they are still lagging behind, even with the recent expansions of the asset purchasing programme.”
However, while bankers uniformly express their disappointment at the BoJ’s announcement this week, they do share a level of optimism. The BoJ’s governor, Masaaki Shirakawa, will see his tenure at the central bank end on April 8. As Shirakawa has been persistently hesitant to adopt more aggressive easing measures, market participants believe that the newly installed central bank governor – assuredly an Abe sympathiser – will announce more aggressive easing measures as soon as he takes office.
“We expect that the BoJ will announce additional actions specifically after April when the new BoJ governor takes his place. Everyone right now is holding their breath for the next step,” concluded the Tokyo-based economist. “There’s still a gap between what the government is asking for and what the BoJ is looking to do. The market really believes that a bolder action is necessary, and while we can’t tell what the new governor should come up with, we are hoping to be more satisfied.”