(April 4, 2013) — One of the world’s largest economies pushed the restart button today, and announced a wide range of quantitative and, crucially, qualitative monetary easing strategies to kick-start its finances.
The Bank of Japan announced a variety of new moves it intends to make to help wake its economy from the financial coma it has endured for the past two decades.
Along with a huge increase in the amount of money the central bank intends to pump into the flat-lining economy – some 45% year-on-year for 2013 – the assets that will be purchased have revamped the usual QE strategy favoured in other developed nations.
The bank is to buy large amounts of exchange-traded funds, some of the most liquid financial instruments available, in an effort to pump money into the country’s equity markets. This should support stock prices and encourage listed firms to invest, causing a virtuous economic circle.
This year, it should buy ¥1 trillion in ETFs and a further ¥1 trillion in real estate investment trusts.
QE programmes in the United Kingdom and the United States have been criticized by many institutional investors as they have served to push down interest rates and failed to fire significant new growth in the economy. Several commentators have called on central banks to purchase assets other than government debt to help growth in nations hit by the financial crisis.
Long-term government bonds (JGBs) are to stay on the Japanese central bank’s shopping list as the function helps to drive down interest rates and make borrowing more affordable. From 2013, even longer duration bonds will be bought by the bank to help flatten the yield curve.
Analysts at French bank Societe General said the move was bold, but its implications remained to be seen: “It will increase the JGB purchases substantially from the current pace (about ¥ 4 trillion per month) to about ¥7 trillion per month. It has combined the two separate asset purchase programmes which will help increase transparency of policy and make communications with the market more straight-forward.”
Soc Gen reported that markets reacted positively – the yen dropped and the Nikkei stock surged. The yield on JGBs from five years to 30 year bonds broadly declined, with 10 year bond yields reaching the lowest point since June 2003.
The Bank of England today announced its asset-purchasing programme would remain the same. The European Central Bank is to announce its plans later today.