24th February 2012
The Bank of Japan's 14 February decision to expand its asset purchase program (APP) by ¥10 trillion to ¥65 trillion appears to represent a serious effort to loosen monetary conditions and may contribute to a further weakening of the yen over coming months.
The APP was introduced in October 2010 and stood at ¥44.5 trillion on 20 February. The aim is to reach the new ¥65 trillion ceiling by the end of 2012, suggesting a monetary boost of about ¥20 trillion over the next 10 months, equivalent to $250 billion or 4.25% of Japanese annual GDP.
Sceptics, however, argue that the BoJ is, once again, using an expansion of the headline APP target to deflect political pressure and is unlikely to follow through with a significant liquidity injection. They point out that the rise in the APP to ¥44.5 trillion since October 2010 has not been fully reflected in the size of the BoJ's balance sheet and the monetary base (i.e. notes in circulation plus bank reserves) – BoJ assets have increased by ¥23 trillion and the base by only ¥16.5 trillion.
Less than 40% of the APP "injection", in other words, has fed through to the monetary base. On this basis, the planned ¥20 trillion expansion by the end of 2012 may boost the base by only about ¥8 trillion.
To understand why this is probably too pessimistic, it is necessary to examine the reasons for the limited impact to date.
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