The Economy

Japan Opts for More QE to Ward Off Deflation

As reasons for the move, the Bank of Japan cited weak consumer demand since a sales tax hike in April and a substantial decline in crude oil prices.
Matthew HellerOctober 31, 2014
Japan Opts for More QE to Ward Off Deflation

In a surprise move apparently driven by concerns over deflation, Japan’s central bank announced Friday it was increasing its already large monetary stimulus program to 80 trillion yen ($726 billion) a year, up from 60 to 70 trillion yen.

Haruhiko Kuroda, governor of the Bank of Japan.

Haruhiko Kuroda, governor of the Bank of Japan.

The 5-4 vote of the Bank of Japan’s policy board in favor of expanding quantitative easing followed the U.S. Federal Reserve’s decision earlier this week that it was ending its similar bond-buying program. The unexpected news from Japan sent Tokyo stocks soaring and the Japanese yen falling sharply.

“It’s good for equities, but it’s very, very bad for the yen,” Paul Mortimer-Lee, global head of market economics at BNP Paribas, said on Fox News.

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The U.S. dollar jumped Friday to 110.55 yen from 109.37 yen in less than half an hour, marking the dollar’s highest level against its Japanese counterpart since before the 2008 global financial crash.

In explaining its move, the Bank of Japan cited weak consumer demand since a sales tax hike in April and a substantial decline in crude oil prices.

If the current downward pressure on prices continues, the Bank warned in a news release, there is a risk that Japan’s efforts to end deflation would be compromised. To preempt that risk, “the Bank judged it appropriate to expand the quantitative and qualitative monetary easing,” the statement said.

As BBC News reports, Japan has long struggled with deflation, which has led to stagnant economic growth. Private consumption represents some 60% of Japan’s economic activity and deflation trends in the country have seen consumers hold onto their money in the hope of further price declines.

The central bank’s QE program “is designed to stimulate the world’s third largest economy by encouraging more lending, which in turn should see consumers spending more,” BBC News says.

Data released earlier on Friday showed Japan’s household spending had fallen more than expected in September and that annual core consumer inflation, stripping out the effects of April’s sales tax, was 1%. The Bank of Japan’s inflation target is 2%.

BOJ Governor Haruhiko Kuroda told reporters that the bank had acted at a “critical moment for Japan to emerge from deflation.”

Image: World Economic Forum, via Wikimedia Commons, CC BY-SA 2.0