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Bank of Japan takes up unlimited amount of bonds to support economy



The Bank of Japan boosted the monetary stimulus amidst the coronavirus pandemic and pledged to buy unlimited amount of government bonds to keep the borrowing costs from growing.

The measures BOJ has taken are similar to what other major central banks are doing. They have taken up extraordinary measures in monetary support as the pandemic threatens a deep global recession. The bank cut its economic forecast and predicted inflation falling short of the 2% target for the next tree years which means the immediate focus will be to combat the crisis.

BOJ Gov. Haruhiko Kuroda commented:

Haruhiko Kuroda

The spread of the coronavirus at home and abroad is inflicting a severe impact on Japan’s economy.

The achievement of the BOJ’s 2 percent inflation target … will take time. The outlook for prices is highly uncertain.

The BOJ promised to extend the maximum amount of corporate bonds and commercial debt it buys three times to ¥20 trillion in order to ease the strain on corporate funding.

Japan

The bank set out to buy unlimited amount of government bonds by abandoning loose guidance to buy them at an annual pace of ¥80 trillion. The statement said: “The BOJ will purchase necessary amounts of government bonds without setting an upper limit.” The bank pledged to buy government bonds and short-term securities to keep the markets stable as the government issues more bonds to pay for the huge stimulus package.

Toru Suehiro, senior market economist at Mizuho Securities said:

With today’s move, the BOJ can stand pat on monetary policy for the time being void of a disruptive market move.

The central bank has kept its interest rate targets unchanged as expected. However, it offered to pay 0.1% interest to financial institutions that take up its new loan program in the battle against coronavirus pandemic, aiming to encourage commercial banks to enhance lending to cash poor firms.

Corporate funding costs have risen in Japan even as the BOJ decided last month to expand risky assets purchases such as corporate bonds and commercial debt. The bank also created a loan program to aid funding of firms affected by the pandemic.

The removal of the guidance on bond buying is to a large extent symbolic. The central bank has purchased less than ¥20 trillion per year, as the bank’s powerful presence in the market gives the bank control over yields with fewer purchases. The government still welcomes the move in keeping borrowing costs low.

Economy Minister Yasutoshi Nishimura stated:

Today’s decision would enhance the effect of a policy mix.

However, some economists see the scraping of the guidelines as a sign that the central bank limited policy firepower.

Hideo Kumano, chief economist at Dai-Ichi Life Research Institute and a former Bank of Japan official commented:

Hideo Kumano

The BOJ strengthened its policy in line with expectations, but it failed to go beyond expectations. That shows the BOJ has been running out of ammunition, and it’s getting harder for the BOJ to create fresh measures.

The BOJ shared a quarterly outlook report in which the bank made wide-ranging downgrades through March 2023, predicting contraction of up to 5% this fiscal year.

During this month, Japan expanded its state of emergency, advising people to stay at home and businesses to remain closed, adding pressure to an economy already on the edge of recession.

The government boosted its stimulus package last week to an unprecedented ¥117 trillion, payable partly by issuing bonds.


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Bank of Japan takes up unlimited amount of bonds to support economy

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