Japan looks to spark the economy

7th October 2010

The action by the Bank of Japan earlier week this will result in Interest rates ranging 0% to 0.1% until deflation is driven out of the economy, with a 1% target set for Consumer Price Inflation.

The Bank's $60bn asset purchasing programme, meanwhile, will target not only Japanese government bonds but also risk assets such as commercial paper, real estate investment trusts (REITs) and exchange-traded funds (ETF). The range being targeted is something no other central bank has considered, says Shogo Maeda, head of Japanese equities at Schroders.

The BoJ furthermore said it would expand this size of the asset purchase programme if necessary.

Maeda says: "This was a positive message to the market and sentiment improved on the belief that at last the BoJ and the Japanese government – which is about to release additional stimulus measures – are working together to deal with deflation and economic slowdown."

Maeda adds that the moves by the Bank did not have an immediate meaningful impact on the currency, as the yen appreciated against the dollar, but he believe it will help to offset pressure on the yen in time. "The measures are broadly positive for the market as a whole, and probably most positive for sectors such as real estate, housebuilders and highly leveraged companies," he says.

Following Japan's move, all eyes yesterday were on the Bank of England's decision on rates. As widely expected rates were kept on hold and QE left unchanged.  Clearly most of the members on the Bank's Monetary Policy Committee are continuing to hang fire on supporting more quantitative easing for the UK.

Most notably, Adam Posen a member of MPC, recently called for another round of QE to help sustain recovery. More widely though, many economists believe another round of QE is difficult to justify, with some of the reasons outlined in this Mindful Money article.

Keith Wade, chief economist at Schroders, says at present, with bond yields approaching new lows and the markets enjoying healthy liquidity it is difficult to see how another round of action from the central banks will make much difference.

"We would expect the main effect of QE will be to boost deposits in the banking sector, but to have little effect on activity as banks and households continue to reduce their gearing."

He stresses however that that does not mean that QE will never have any effect:  "Eventually we would expect bank lending to resume and for the extra liquidity to find its way into the real economy. There will then need to be some nimble manoeuvring to reverse the effect of QE on inflation. Yet, that is probably a couple of years away, at least.

"Central banks may recognise this, but they also know that they need to be seen to be acting. In the battle against a double dip or deflation, no one wants to be found with any spare ammunition."

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