Japan: BoJ expands QE programme in surprise easing move

In a big surprise move, the Bank of Japan (BoJ) expanded its QE programme quite aggressively in connection with today’s monetary meeting. It expanded the target for the annual expansion in the monetary base (currently the main policy instrument) to JPY80trn from JPY60-70trn previously.

The BoJ is expanding the monetary base with asset purchases (mainly government bonds) in addition to using ordinary liquidity tools. Today, it expanded its planned asset purchases even more aggressively than the target for the monetary base, meaning that in the future it will rely more on asset purchases to expand the monetary base.

The target for annual purchases of government bonds has increased to JPY80trn, up from JPY50trn previously. Purchases of exchanged traded funds (ETFs) were increased to JPY3trn, from JPY1trn, while purchases of real estate investment trusts (REITs) were increased to JPY90b, up from JPY30trn. In addition, the average maturity of the BoJ’s government bond purchases increased from seven years to seven to 10 years.

The BoJ’s main argument for expanding the QE programme is the recent downward pressure on inflation. CPI excluding fresh food and the impact of the consumption tax increase in September eased to 1.0% y/y, from 1.1% y/y in August, and is substantially off its peak of 1.5% y/y in April. The BoJ has a 2% inflation target but has also set a deadline for reaching the inflation target in fiscal year 2015 (ending in March 2016). In connection with today’s meeting, the BoJ also released revised macroeconomic forecasts. It revised the forecast for CPI excluding fresh food and the impact of the consumption tax down to 1.7%, from 1.9% previously, meaning the BoJ has implicitly acknowledged that it has become more difficult to reach its inflation target.

In the statement released this morning, the BoJ said it still believes the Japanese economy is recovering and will continue to grow at a pace above its potential (estimated to be just 0.5% by the BoJ). Recent data have also indicated that the economy has finally started to recover following the slowdown in the wake of the consumption tax hike. The BoJ revised its growth forecast for fiscal 2014 down to 0.5%, from 1.0% previously, but maintained its growth forecast for fiscal 2015 at 1.5%. The downward revision in 2014 largely reflects that, in the wake of the consumption tax hike, growth in Q2 and Q3 was weaker than expected.

Today’s easing move was a big surprise although it had been our view that additional easing was possible next year, because it was looking increasingly difficult to reach the 2% inflation target. It was not a consensus decision. The decision to expand the QE programme was approved with the slimmest majority in a five to four vote. This underscores that BoJ governor Haruhiko Kuroda is extremely determined to push through his agenda, even sacrificing a possible consensus of the BoJ board. Today’s move also underscores that the BoJ has become extremely proactive since Kuroda became governor in April 2013. In our view, today’s move also makes it easier for the government to go ahead with the planned consumption tax increase from 8% to 10% from October next year.

The BoJ was already easing aggressively and today it has expanded its programme quite aggressively. This is negative for the JPY and very positive for Japanese stocks, not least in light of the aggressive expansion of the BoJ’s ETF purchases. It should also be positive for global risk sentiment in general. The BoJ is poised to add substantial liquidity to the economy well into 2016. Today’s move could also increase speculation that the ECB will have to step up its easing further.