Another Defibrillator

The Bank of Japan decided further monetary easing, raising the limit of annual purchase of long-term national bond from ¥50 trillion to ¥80 trillion. The decision would also increase the purchase of exchange trade funds and real estate investment trust by three times. Among nine members of policy committee, four opposed the decision, concerning negative impact on Japanese economy. The policy of BoJ firmly reflects determination of Shinzo Abe administration that is straightly heading toward the achievement of economic agenda.

By injecting more money into the markets, BoJ looks to supporting economy from the side of monetary policy. Consumption after introducing new rate of sales tax in April declined more than governmental officials expected. Gross domestic products declined by 7.1% in the second quarter of this year. BoJ will review the perspective of growth this year from 1.0% in the time of July to the lower. Although commodity price is currently getting settled from the enthusiasm in April, the bank assessed that further measure was necessary.

The crucial element of the monetary easing was further tax hike next year. Abe is going to make final decision on it late December. BoJ’s policy was aimed at paving the way to delivering a “go” signal. Stock market showed positive response with significant rally in Nikkei Average. Yen against U.S. dollar steeply declined, a preferable phenomenon for exporters. Ministry of Finance, to which BoJ Governor Haruhiko Kuroda long affiliated, firmly believes that there will be no hesitation on further tax hike.

Ministry of Health, Labor and Welfare approved new guideline of Government Pension Investment Fund, which allowed more flexible operation of its money. With its new policy, GPIF may sell out a great amount of long-term national bond, which can cause abrupt hike of long-term interest. Monetary easing policy of BoJ may support the volatility of long-term bond, as MoF expects.

However, there is no guarantee of revitalization of consumption. As long as salary does not show positive figure, there will be no perspective of success in getting rid of deflation. Even a possibility of stagnation will be increase. Compared to the situation of big corporation in big cities, regional economy is lagging behind.

In the time when skepticism on Abenomics is spreading, the stimulus policy sounds like defibrillator for declining Japanese economy. “There is a risk of delaying in conversion of deflation mind, which has been in progress,” told Kuroda about the reason of his new policy. However, it is unclear this isolated policy, totally going to different direction from U.S. Federal Reserve, may work preferably.