BoJ alters policy to spur growth

Dhaka,  Monday,   2016-09-21
Published : 21 Sep 2016, 14:18:07

Bank of Japan alters policy to spur economic growth

The Bank of Japan has made changes to its stimulus programme, in its latest attempt to spur economic growth.

The bank kept interest rates unchanged, but said it would aim to keep yields on 10-year government bonds at around current levels of zero per cent.

The BoJ is also aiming to push inflation above the 2.0 per cent target rate, which was set more than three years ago.

It will continue to buy assets such as government bonds, at the rate of 80tn yen ($787bn; £605bn) a year.

Japan's Nikkei share index rose after the announcement, while the yen weakened to about 102.5 yen against the dollar.

'FAILING POLICY'

Analysts were sceptical about whether the policy changes would be successful.

"They seem to be determined to get the message to the market that they are going to stay on course and continue to buy bonds until they get the inflation rate above 2.0 per cent," said Tim Condon, chief economist for Asia at ING.

"I don't think it's going to be easy to get the 2.0 per cent. It's an Abenomics problem, not the Bank of Japan's problem."

Michael Hewson, chief market analyst at CMC Markets UK, said: "Ultimately while these actions may well help the banks, it's doubtful they will to help the Japanese economy that much, and in some ways it shows how little flexibility the central bank has, given how experimental policy is now becoming.

"To sum up, this morning's actions by the central bank are not so much an easing as a tinkering around the edges of a failing policy."

The Bank of Japan kept its benchmark rate on hold at -0.1 per cent. It introduced negative interest rates in January this year, hoping that commercial banks will use their reserves to lend to businesses, in an attempt to counter the country's economic stagnation.

There was an expectation that Japanese interest rates would fall even further below zero to boost spending in the world's third largest economy, which has been plagued with low growth for the past two decades.

But the negative interest rate policy was considered a failure by some in Japan's financial circles because it pushed the Japanese yen higher against the US dollar, making the price of Japanese goods more expensive overseas, which threatened Japan's economic recovery.

It also hurt the profitability of banks because their excess reserves were hit by a charge.

So the decision NOT to lower rates further has in itself been seen as a short term boost for markets and the yen - which is now trading lower against the US dollar.

But some analysts are telling me that this won't last - and in fact, the modifications that Japan has made to its monetary policy in place of lowering interest rates further below zero won't be that effective in the long term.

The new policy measures are being dubbed by some critics as approaching the limits of what monetary policy can do to fix economic problems.

But these measures aren't supposed to operate within a vacuum.

The central bank's moves are meant to work in tandem with the government's Abenomics policies - the three pillars which include structural reform. 

Japan's government must do more to deliver the goods on structural reforms as part of its Abenomics policy to boost growth, rather than continue to rely on the central bank.

THE THREE ARROWS: EXPLAINING ABENOMICS

Japanese Prime Minister Shinzo Abe's economic policy, which quickly became known as "Abenomics" is based on three arrows:

#The monetary arrow: expansion of the money supply to combat deflation

#The fiscal arrow: increased government spending to stimulate demand in the economy

#The structural arrow: structural reforms to make the economy more productive and competitive

ZR

 
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