BoJ’s stimulus move meant to boost economy

The decision of Bank of Japan (BoJ) to keep monetary stimulus unchanged sent mixed messages to the stock markets, with Tokyo shares closing down 0.68% after the announcement, while the yen strengthening against all its 16 major peers.
The yen’s reaction on Tuesday threw the ball in the court of Japan’s central bank chief to convince the market of the effectiveness of the current policy. The yen weakened 1.9 percent versus the dollar on January 29, when the BoJ surprised markets by announcing the introduction of negative deposit rates.
The continued weakness prompted the BoJ to impose a “negative interest rate” policy that took effect last month and requires banks to pay a fee of 0.1 percent on excess reserves kept at the central bank. That measure followed similar moves in Europe but is unpopular with financial circles and the public.
Japan’s central bank chief Haruhiko Kuroda on Tuesday brushed aside the criticism by defending a negative interest rate policy as a desperate bid to keep alive efforts at resuscitating the world’s number three economy.
It has to be seen whether the current monetary policy needs time to materialise. “Simply put, the negative interest rate policy will further strengthen the past monetary stimulus programme. The move would help push down interest rates, resulting in lower borrowing costs for consumers, such as on home mortgages,” Kuroda said.
The BoJ’s move aims at giving banks an incentive to lend out money and, in turn, stoke growth in the wider economy. But critics also said it was unlikely to boost loans, given already weak demand from both businesses and the general public.
Worried investors who doubt the central banks to do much were closely watching the BoJ as concerns mount that central banks are running out of ammunition to boost the sagging world economy.
With feverish efforts to boost economy, the European Central Bank last week unveiled dramatic new stimulus measures, while US Federal Reserve officials are meeting to decide whether to delay raising interest rates.
Kuroda previously sounded an alarm, citing financial market turmoil and slowing growth in China as he ushered in the -0.1 percent rate for new bank reserves, and said the BoJ may go even further into negative territory.
Apparently, investors have given a short shrift to the decision of BoJ as they focus their attention on the two-day US Federal Reserve meeting. Though investors and analysts are not expecting the Fed to hike rates this week, the meeting could offer fresh clues to the central bank’s outlook for the world’s top economy.
Though the BoJ kept its massive monetary policy stimulus intact on Tuesday, as widely expected, further action may be needed in the coming months on the back of a tumble in the consumer inflation rate. The BoJ voted 8-1 to maintain its pledge of increasing base money at an annual pace of 80 trillion yen ($659 billion) via purchases of government bonds and risky assets.
Yet, analysts had been divided over whether the BoJ would expand its lavish asset purchases or cut interest rates to spur growth. The uncertainty caused share prices to tumble in most regional markets on Tuesday.
The BoJ’s unexpected cut of a benchmark interest rate below zero in January has failed so far to boost stock prices or arrest an unwelcome rise in the yen. Yet, the unpopularity of negative rates may mean the BoJ will opt to upgrade its asset purchases again, instead of cutting rates more deeply.