Japan is making a sweeping shift in its monetary policy, aiming to spur inflation and get the world’s third-largest economy out of a long, debilitating slump.
Bowing to demands from Prime Minister Shinzo Abe for more aggressive monetary easing, the Bank of Japan announced Thursday a policy overhaul intended to double the money supply and achieve a 2 percent inflation target at the “earliest possible time, with a time horizon of about two years.”
BOJ governor Haruhiko Kuroda described the scale of monetary stimulus as “large beyond reason,” but said the inflation target would remain out of reach if the central bank stuck to incremental steps.
“We’ll adjust without hesitation if need be, while monitoring economic and price conditions,” he said.
The BOJ is joining the U.S. Federal Reserve and other major central banks in soaking the economy in money in hopes of getting corporations and consumers to begin spending more in a virtuous cycle that would put growth back on track after two decades of malaise.
The central bank said it intended to “drastically change the expectations of markets and economic entities.”
Financial markets, which had feared Kuroda might not live up to expectation for bold steps, reacted with relief. The Japanese yen, which was trading at about 92.8 yen per U.S. dollar, dropped to about 95.5 yen per dollar after the announcement. The benchmark Nikkei 225 stock index rebounded from negative territory to close 2.2 percent higher.
“By committing today to meet a 2 percent inflation target in two years, Gov. Kuroda can justifiably claim to have set the Bank of Japan on a new path,” said Mark Williams of Capital Economics.
“But while markets have welcomed the announcement, the credibility of this pledge is soon likely to be called into question,” he said in a commentary.
Kuroda has pledged to do what he must to meet the inflation target within two years. Thursday’s decision after a two-day policy meeting makes that central bank policy. Signalling a consensus behind Kuroda, most items agreed upon received unanimous support from the nine-member board.
The policy shift is a coup for Abe, whose Liberal Democratic Party needs to make headway in reviving the economy before an upper house parliamentary election in July. The LDP is hoping for a strong enough mandate to push ahead with other items on their wish list, such as politically difficult economic and educational reforms and changes to the constitution to give Japan’s military a higher profile.
