Bank of Japan loosens its belt another notch

Japan’s central bank ploughed on with its monetary easing yesterday, increasing the size of its asset purchase programme and setting up an unlimited loan facility to stimulate bank lending.

The announcement carried no real surprises. The Bank of Japan is upping its purchases by ¥11 trillion to ¥91 trillion, mainly in the form of government securities, but also a small amount of riskier asset such as J-Reits and ETFs, while the lending measures will provide banks with access to long-term loans at 0.1% in a bid to boost bank loans to corporates.

A few optimists had held out hope that the central bank would take a bolder approach given the increasingly weak outlook, but the BoJ seems to have become accustomed to missing its own targets.

Indeed, at the same time as it was unveiling the latest plan to ease monetary conditions, it also revealed downward revisions to its growth and inflation estimates.

Growth during 2013 is now expected to be a touch lower at 1.6% while inflation will be down to just 0.4%, or almost half the July forecast of 0.7%. And it is now expected to take until 2014 to reach 0.8% inflation, which is still shy of the 1% target.

That leaves plenty of room for further asset purchases next year, particularly J-Reits and ETFs.

More certainly needs to be done. If the BoJ’s forecasts end up being accurate, Japan will have had a decade of roughly 0.5% growth and close to zero inflation.

The next hope is that the government will step in with new spending plans to, which the new loan facility hints at, according to analysts.

“This is a mechanism to prevent crowding out alongside expansionary fiscal policy and increase in JGB [Japanese government bond] issuances,” said Takuji Aida, senior economist at UBS in Tokyo, in a note to clients. “With the government and the BoJ likely working more closely together to overcome deflation, we would hope to see further fiscal expansion alongside the launch of this programme.”

However, both the government and the central bank are set for leadership changes early next year. Two BoJ deputy governors will step down in March 2013 and the governor’s term is up in April.

“The next governor and deputy governors (who will be appointed upon approval by the Diet) are likely to be dovish,” wrote Aida. “We would not rule out the possibility of the BoJ’s policy stance changing quite significantly from next April. We would hope to see a mix of fiscal and monetary easing (for the first time in 20 years) to help Japan overcome deflation.”

In parliament, opposition politicians are calling for a general election before the end of the year in a bid to oust the prime minister, Yoshihiko Noda, who took office in September last year.

It is unlikely the ruling Democratic Party of Japan will give in to such demands, but in the meantime it is also unlikely there will be any bold new fiscal initiatives.

That means a relatively long wait before the central bank and the government are really in a position to get their act together. But will they?