Bank of Japan sets course for QE

By Jonathan Soble and Mure Dickie in Tokyo

Published: October 5 2010 06:20 Last updated: October 5 2010 09:31

The Bank of Japan has set a course for “quantitative easing” in a bid to shore up the nation’s faltering economic recovery.

The central bank on Tuesday said it was considering creating a Y5,000bn ($59.7bn) programme to buy assets to increase liquidity in the financial system, as part of a “comprehensive monetary easing policy”.

In recent months, the central bank has come under criticism from the government and many economists that it was responding too timidly to weak demand and falling prices.

In a statement, the bank said it would “maintain the virtually zero interest rate policy until it judges…that price stability is in sight”.

The asset-buying programme would be similar to “quantitative easing” policies adopted by central banks in the US and Europe.

The Bank of Japan said it would look at buying government and corporate bonds, commercial paper, exchange-traded funds and real estate investment trusts.

Japan’s previous experiment with quantitative easing, from 2001 to 2006, involved injecting commercial banks with excess cash.

Chiwoong Lee, an economist at Goldman Sachs, said the aggressiveness of the monetary easing was “a big surprise”.

“They will have tried every monetary policy that is presently conceivable 可想到的, 可想像的; 可理解的; 可相信的,” he said.

The likelihood of new action on monetary policy appeared to increase last month when the central bank signalled that it would not rush to withdraw extra liquidity in the financial system created by Tokyo’s recent yen-weakening intervention in the currency market.

Some analysts were anticipating a more limited expansion of the bank’s cheap three- and six-month credit facilities or greater purchases of government bonds, the one financial asset the bank currently purchases outright.

In its statement the Bank of Japan said: “Although Japan’s economy still shows signs of a moderate recovery, the pace of recovery is slowing down partly due to the slowdown in overseas economies and the effects of the yen’s appreciation on business sentiment.”

Japanese industrial production declined 0.3 per cent in August from the previous month, confounding economists who had predicted a 1.1 per cent rise. Meanwhile, the central bank’s quarterly Tankan business sentiment survey found that big manufacturers were pessimistic about the outlook for this quarter.

After the announcement, the dollar climbed from Y83.55 to Y83.90, while 10-year Japanese government bond futures rose slightly. The Nikkei stock average reversed an intra-day decline, ending up 1.5 per cent