For the first time in over a year and a half, the Bank of Japan decided to launch another round of stimulus measures, known as quantitative easing. After concluding its monetary policy meeting on Friday, the Japanese central bank announced it would raise its monetary base target to an annual increase of 80 trillion yen from 60-70 trillion yen.
The reason behind the BoJ’s move today was to combat risks of deflation, as the Bank was concerned that its 2% inflation target looked increasingly untenable. The BoJ policy board voted 5-4 in favour of monetary policy easing.
The BoJ also announced it will increase its purchases of government debt by about 30 trillion yen and extend the average duration of JGB (Japanese government bond) holdings to around 10 years. In addition, the central bank will triple its purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (REITs).
The expansion of stimulus in Japan will have broad implications for the markets, particularly on the yen, which will weaken further against the dollar.
The yen tumbled to its lowest level in over 6 years against the dollar, as the dollar/yen exchange rate surged up to as high as 111.87 in European trading, its strongest since January 2008. The euro hit a high of 140.69.
While some market players had expected some easing, they did not expect it so soon as BoJ Governor Haruhiko Kuroda had recently expressed his optimism over the Japanese economic outlook.
However, while the BOJ maintained its view that the Japanese economy is recovering and is expected to continue its recovery, it showed concern that the recent weakness in the economy may endanger its efforts to overcome deflation.
The Bank of Japan mentioned in a statement it released after its meeting that:
“If the current downward pressure on prices remains, albeit in the short term, there is a risk that conversion of deflationary mind-set, which has so far been progressing steadily, might be delayed,”