However, while the current 3 trillion yen in monthly asset purchases consists of 1.8 trillion yen in long-dated Japanese Government Bond (JGB) purchases, as well as around 1 trillion yen in short-dated Japanese Treasury bills, with the remainder in other assets (corporate bonds, commercial paper, exchange-traded funds, etc), the new 13 trillion yen in monthly purchases from January 2014 will consist of 2 trillion in JGBs, 10 trillion in Treasury bills, and 1 trillion yen in other assets. This means the bulk of the increase is in short-term government Treasury bills, which roll over quickly, implying that the BoJ’s balance sheet will not increase at a substantial rate, although its assets will still rise faster than under the current programme.
Nevertheless, these three essential moves – a doubling of the inflation target, a lift in the asset purchase programme from January 2014, and an open-ended QE commitment – all signal a significant loosening in monetary conditions, a key pillar of Abe’s new economic policy and an agenda being seriously pursued by the newly elected members of The National Diet.
The motive is clear. Abe wants to break the deflation cycle and a strong yen, both of which have been choking off Japan’s economic growth over the last 15 years. In fact, the two problems are interconnected. Typically when central banks pump liquidity into markets following recessions, businesses and consumers borrow, growth picks up and eventually inflation rises. This is not the case in Japan, where deeply entrenched deflationary expectations and other factors weigh on loan demand. The combination of deflation in Japan and inflation elsewhere pushes up the purchasing power of the yen relative to other currencies. A strong yen in turn weighs on exports, the main driver of growth in the Japanese economy. And that’s exactly what is happening in the Land of the Rising Sun, which has been in recession for most of 2012 (its fifth recession in the last 15 years).
Even the revised estimate of Japan’s third quarter GDP was unchanged at -0.9% q-o-q, against expectations for a modest improvement. The annualised figure too remains unchanged at -3.5%, confirming the economy’s dire state through the second half of 2012. Consequently Tankan Survey (an economic survey of Japanese business issued by the BoJ) shows a sharp deterioration in sentiment through the fourth quarter of 2012. The headline diffusion index for large manufacturers has fallen from -3 in the September quarter to -12 in the December quarter. Confidence among small and medium-sized manufacturers and among non-manufacturers has also fallen. All this clearly reflects an economy that is contracting through 2013
Nevertheless, these three essential moves – a doubling of the inflation target, a lift in the asset purchase programme from January 2014, and an open-ended QE commitment – all signal a significant loosening in monetary conditions, a key pillar of Abe’s new economic policy and an agenda being seriously pursued by the newly elected members of The National Diet.
The motive is clear. Abe wants to break the deflation cycle and a strong yen, both of which have been choking off Japan’s economic growth over the last 15 years. In fact, the two problems are interconnected. Typically when central banks pump liquidity into markets following recessions, businesses and consumers borrow, growth picks up and eventually inflation rises. This is not the case in Japan, where deeply entrenched deflationary expectations and other factors weigh on loan demand. The combination of deflation in Japan and inflation elsewhere pushes up the purchasing power of the yen relative to other currencies. A strong yen in turn weighs on exports, the main driver of growth in the Japanese economy. And that’s exactly what is happening in the Land of the Rising Sun, which has been in recession for most of 2012 (its fifth recession in the last 15 years).
Even the revised estimate of Japan’s third quarter GDP was unchanged at -0.9% q-o-q, against expectations for a modest improvement. The annualised figure too remains unchanged at -3.5%, confirming the economy’s dire state through the second half of 2012. Consequently Tankan Survey (an economic survey of Japanese business issued by the BoJ) shows a sharp deterioration in sentiment through the fourth quarter of 2012. The headline diffusion index for large manufacturers has fallen from -3 in the September quarter to -12 in the December quarter. Confidence among small and medium-sized manufacturers and among non-manufacturers has also fallen. All this clearly reflects an economy that is contracting through 2013
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