BOJ Boosts Stimulus, but Markets Unconvinced

Action seen as driven by political pressure

A stock board in Tokyo. (Photo: AP) A stock board in Tokyo. (Photo: AP)

Despite actions taken by the Bank of Japan (BOJ) to boost asset-buying by an additional 10 trillion yen ($124 billion), and a pledge to buy longer-term government bonds, markets shrugged off the move and chalked it up to pandering to political pressure rather than a genuine effort to combat deflation.

Reuters reported Friday that the BOJ's second stimulus in two months was seen mostly as a symbolic gesture, not as a real strategy, and came as Japan's economy was picking up.

While the stimulus came at the top of an expected 5-10 trillion yen range and seemed at first to reassure investors, with the yen falling and an accompanying announcement that the BOJ would also buy more ETFs and real estate-linked funds helping to boost shares, the effects wore off quickly. Cynical investors interpreted a decision by the central bank to take more time to achieve its bond-buying objective as an exercise in futility, as if the bankers themselves doubted the effectiveness of the strategy on the economy.

"The leopard doesn't change its spots. [BOJ] doesn't view monetary accommodation as a cure capable of reversing Japan's deflation," Tim Condon, chief Asia economist at ING in Singapore, said in the report. He added, "They seem motivated by politics and political pressure in these last couple of moves ... so I think they will do the minimum that they feel they are forced to do."

According to BOJ Governor Masaaki Shirakawa, the decision for additional easing was made to support the "positive momentum" of a rising economy. While he offered little insight into where monetary policy might go in the future, he did indicate that there might be some delay before the BOJ takes further action, saying it would "carefully and calmly" assess effects of recent actions.

In the report he said, "We'd like to achieve 1% inflation in Japan as soon as possible. But it takes quite a long time for the effect of monetary easing to appear on the economy." He added, "Recklessly easing without taking into account that lag effect would destabilize price moves."

Westpac chief currency strategist Robert Rennie in Sydney was unconvinced of the efficacy of the BOJ's actions. "I find these moves disappointing," he said in the report. "Yes, the BOJ will own more JGBs by mid-2013. Indeed they will own more JGBs by end of 2012. However, the total size of the asset purchase program has not increased by the end of this year." He concluded, "This is the disappointing part for me."

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