Bank of Japan doubles inflation target to 2%

Japan has agreed an unprecendented amount of economic lever-pulling in a bid to boost growth. It has doubled its inflation target and plans to invest billions of yen in asset purchases.

by Rebecca Burn-Callander
Last Updated: 09 Oct 2013

It's been quite a day for Japanese politics. The Bank of Japan, which has always fiercely guarded its independence, has heeded calls from Prime Minister Shinzo Abe to introduce radical reforms to help stimulate the flagging economy.

Not only has the Bank doubled its inflation target to 2%, it has also agreed to an open-ended asset purchasing plan from 2014. That means that the Bank will effectively pump billions of yen into the economy.

While the UK struggles to keep inflation at manageable levels, Japan's economy suffers from the opposite problem. Over the past two decades, persistant deflation has seen the cost of goods fall. This does not result in a buying bonanza, as you might think. In fact, consumers tend to be even more cautious with their spend, waiting for prices to fall even further.

For business, deflation is a real killer, eroding profits and making it much harder to pay off debts. Meanwhile the strength of yen has made it almost impossible for Japan's export countries to afford their wares, even with the effects of deflation.

It was quite the liquidity pickle.

When Abe took office for the second time last year, he vowed to halt deflation, and to boost trade in the country. To do so, however, he locked horns with the Bank of Japan, which has traditionally been immune to any kind of political pressure. Yet today, at the end of a two-day policy meeting, the bank of Japan released a rare joint statement with government, saying, 'The BOJ will pursue powerful monetary easing by maintaining virtually zero interest rates and purchases of financial assets as long as it deems appropriate.'

In translation: the Bank will buy about 13tn yen ($145bn; £92bn) in assets each month starting in January 2014 and continue to do so as long as is necessary. This will not only flood the economy with cash, it will substantially weaken the yen, creating an export boom.

But while this new strategy seems an (almost) foolproof way to kickstart the Japanese economy, the question remains: why wait a whole year to get it started? It's a question that the markets must be asking too. Tokyo was down 0.4% following the statement...

For an in-depth analysis of the plight of the Japanese economy, check out our feature, Japan: The descent of the rising sun

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