Bank Of Japan Boosts Stimulus

Online, October 31, 2011 (Newswire.com) - The Bank of Japan has eased monetary policy by expanding asset purchases as the yen's strength and slow progress by European leaders in solving the region's debt crisis cloud the outlook for the country's fragile economy. The Bank of Japan (BOJ) has expanded its asset purchase programme by 5tn yen ($66bn; £41bn) in a bid to boost growth, and left interest rates unchanged at between zero and 0.1%. The BOJ decided on additional easing because it believes "price stability" (which it has defined as annual increases of 1%) is still some time away and as it aims to ensure "a successful transition" to sustainable growth, the central bank said in a statement released together with the decision.

The central bank has been buying a variety of financial assets-from government and corporate debt to exchange-traded funds and real-estate investment trusts-in a bid to lower interest rates and risk premiums. The program, which also includes purchases of corporate debt and exchange-traded funds in addition to government bonds, was initially introduced in October last year. The last time the BOJ decided to expand the program was on August 4th, and at that time by 10 trillion yen. Under the latest decision, the BOJ will increase the size of purchase of Japanese government bonds by 5 trillion yen to 9 trillion yen, bringing the total size of the asset purchases to 20 trillion yen. The size of the fixed-rate funds-supplying operation against pooled collateral was maintained at 35 trillion yen.

Japan is wary that a strong yen, which erodes the global competitiveness of Japan's exporters and their earnings, could weigh on its economy. The bank said the core consumer price index, which excludes some volatile elements, would be virtually flat this fiscal year-ending in March-and rise just 0.1% next year and 0.5% the year after. Yet, the bank believes that the Japanese economy will return to "a moderate recovery path," given that the pace of recovery in overseas economies is expected to pick up and demand for reconstruction from Japan's March earthquake should rise.

Uncertainty in the global markets driven by the European debt crisis and fears of a slowdown in the US has encouraged investors to buy the Japanese currency as a safe-haven asset. It was trading at 75.94 yen against the US dollar in Asian trade. However, analysts at Corolla Financial say that the central bank's decision is unlikely to help weaken the yen as investors are likely to stick to less risky assets for now.