BOJ Embarks On JGB Spending Spree

At his first Policy Board meeting, the newly appointed BoJ Governor Kuroda announced some radical measures. The Bank will double the monetary base in two years, mainly through JGB purchases. This strategy is risky, as it could lead to the building up of speculative market bubbles.

The BoJ will change the target for money-market operations. Instead of keeping the overnight call rate close to zero, the Bank will now directly target the monetary base, i.e. cash in circulation and the reserves that financial institutions hold with the central bank. The BoJ aims to increase the monetary base at an annual pace of cJPY 60-70 trillion. By end of 2014, the base money should reach JPY 270 trillion (or 55% of GDP).

This will be realized mainly by stepping up JGB purchases. By end 2014, the BoJ should have acquired JPY 190 trillion, which is around 30% of all JGBs, compared with 10% at the moment. JGBs with all maturities including 40-year bonds will be made eligible for purchase. The average maturity of the Bank’s JGB holdings will be extended from slightly less than three years to about seven years, the average maturity of all outstanding JGBs. To facilitate these massive purchases, the BoJ will reinforce the dialogue with market participants.

The BoJ will increase purchases of more risky assets such as Exchange Traded Funds (ETF) and Japan real estate investment trusts (J-REIT) at an annual pace of JPY 1 trillion and JPY 30 billion respectively.

This package of measures aims at raising inflation to the Bank’s price stability target of 2%. In January, at the adoption of the 2% inflation target, the BoJ was committed to achieve the target at the earliest possible time. Today, the BoJ set a two-year horizon for achieving this aim.

The Governor was supported by all the other board members, except for Mr. Takahide Kiuchi, who probably finds the new strategy too risky. Indeed, the massive bond purchases could lead to the building up of speculative bubbles in the market. Moreover, consumer prices (excluding fresh food) have never risen by more than 2% per annum since 1997, when the VAT rate was raised. The BoJ policy could make the government more complacent concerning budget consolidation.

BY Raymond VAN DER PUTTEN

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