Japan is now the third largest economy in the world after the United States (#1) and China (#2). It lost second place to China in 2010. Now, with a new leader at the helm, the Bank of Japan (BOJ) is embarking on an aggressive move that will hopefully end deflation. What many consider as a form of shock therapy aims to end decades of economic stagnation in the country. The objective is to double government bond holdings by 2015 and promises an addition of $1.4 trillion in two years for the economy of Japan.
Local and international response
Within the Japanese community of economists and financial experts there are skeptics of course, but there are believers in this radical move as well. And some say that within slightly more than a year, the effects will be evident.
The publicized move has also garnered reactions from the international community. For one, the Finance Minister of Germany insists that structural reforms are still necessary and that the Japanese cannot solely rely on this boost from the central bank to solve their economic issues. In an interview Minister Schaeuble points out that monetary policy is not necessarily the right direction to take for Japan. French Finance Minister Moscovici is in agreement with this observation and said that artificial means are not the best solution.
Reviving the economy
Despite being the third biggest economy in the world Japan experienced economic difficulties and has in fact been in and out of recession in the recent past. The current government headed by Prime Minister Shinzo Abe pledged a revival after the Liberal Democratic Party won the December 2012 election. Evidently, this recently announced move by the Bank of Japan is just one of the first of a series of moves to fulfill the promise that they have pledged to fulfill.
Very high expectations
After a recent policy meeting headed by the new Bank of Japan Governor Haruhiko Kuroda the institution released a statement that it would move forward to achieving its 2% inflation target given the monetary stimulus. The plan includes not just doubling government bonds and funds but purchasing government bonds of different maturities as well. One strategy revealed is that the BOJ will start off by buying Japanese government bonds worth seven trillion yen a month.
Ripples
Shares in Japan have surged in the latter part of 2012 and Nikkei rose for a day – the highest it had risen in a couple of months as expectations on the aggressive monetary policy increase. In the days leading to the BOJ meeting, the strength of the yen wavered. The unanimous decision of the nine members of the policy board of the Bank of Japan is now affecting a ripple effect that will definitely be felt so much more in the days to come. What is now considered as the world’s greatest burst yet of monetary stimulus caused a record low in bond yields in Japan.
The next meeting of the policy making body of the Bank of Japan is on April 26.
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