TOKYO — Bank of Japan (BOJ) governor Haruhiko Kuroda on Thursday began his drive aimed at ending two decades of economic stagnation and 15 years of deflation as the central bank pledged unprecedented easing, driving the yen down by the most since October 2011.
The BOJ planned to purchase ¥7.5-trillion of bonds a month and double the monetary base, which included cash in circulation, in two years, the central bank said in Tokyo on Thursday. That exceeded economists’ median estimate of ¥5.2-trillion a month and is the biggest move since quantitative easing began in 2001.
Stocks surged as Mr Kuroda won investors’ confidence in a campaign to revive the world’s third-biggest economy, mired in three recessions in the past five years. The BOJ set a two-year horizon for the price target under a "new phase of monetary easing", as the governor won the backing of a board mostly appointed by the previous government.
"It’s fast and furious," said Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, and formerly of Goldman Sachs. "The specific mention of a two-year time horizon was a positive surprise."
The Nikkei 225 stock average rose 2.2% and is up 45% from mid-November. The yen slid 2.6% to 95.45 to the dollar in Tokyo on Thursday morning, the largest one-day decline since October 2011. Yields on 10-year Japanese bonds touched a record low of 0.425%.
The BOJ said it changed the target for money-market operations from the overnight call rate to the monetary base — cash in circulation and the money that financial institutions have on deposit at the central bank. It predicts the measure will grow to 270-trillion yen by the end of next year. The BOJ dropped limits on the maturities of debt it buys.
The average remaining maturity of government bonds to be purchased by the bank will be about seven years under the new plan, compared with less than three previously. Monthly bond purchases stood at an average of about ¥3.4-trillion in the first quarter, according to data compiled by Bloomberg.
At stake is sustaining growth. Legislators can question Mr Kuroda on Friday on his tactics, during his second set of confirmation hearings in parliament.
The bank will increase holdings of exchange-traded funds and real-estate investment trusts by ¥1-trillion and ¥30bn a year respectively. The BOJ scrapped the asset-purchase programme set up by former governor Masaaki Shirakawa that was previously its main tool for easing, and said it would buy bonds with maturities of as much as 40 years.
Under a so-called bank note rule, the BOJ had pledged to keep the value of its bond holdings below the amount of cash in circulation, excluding securities held under its asset-purchase programme. That guideline was "temporarily suspended," the central bank said.
Only one board member, Takahide Kiuchi, voted against any of Mr Kuroda’s policy proposals. The new policies would "lead Japan’s economy to overcome deflation that has lasted nearly 15 years", the central bank said in a statement.
"Thursday’s decision clearly heralds a regime change at the BOJ," said Hiroaki Muto, an economist in Tokyo at Sumitomo Mitsui Asset & Management. "Kuroda has embarked on an experiment of whether boosting the monetary base can prop up economic growth and eradicate deflation."
Not everyone is confident that Mr Kuroda’s plan will work. Former BOJ board member Atsushi Mizuno last month said more bond purchases could inflate a market bubble, while Kazumasa Iwata, a former deputy governor, deemed Mr Kuroda’s two-year goal impossible. Prices excluding fresh food have not risen 2% in any year since 1997, when a sales tax was increased.
In December, Prime Minister Shinzo Abe led his party to electoral victory by pledging to fire "three arrows" to end stagnation: monetary stimulus, fiscal spending, and cutting regulation to increase investment and hiring. An aging population and government debt more than twice the size of the economy are constraints, while the yen’s decline since November is boosting the cost of fuel imports after nuclear power-plant shutdowns.
Sales-tax rises set for next year and 2015 may damp consumption.
The central bank on Thursday said its bond purchases were not intended to finance government spending, and emphasised the need for "a sustainable fiscal structure".
In the US on Thursday, two Federal Reserve district bank presidents said they needed to see stronger job growth before they would support winding down the central bank’s $85bn a month of bond purchases.
"If we see several more months of progress in terms of job creation and some reduction in the unemployment rate, I think later in the year, or perhaps (in) 2014, it would be appropriate to consider tapering off some of our purchases," Atlanta Fed president Dennis Lockhart said on a panel discussion in Dayton, Ohio.