Japan: BOJ Delivers Another Round Of Monetary Stimulus

The Bank of Japan (BoJ) has announced a JPY11trn increase in its asset purchase programme and a new lending facility to stimulate bank lending. There had been widespread expectation of relatively aggressive easing moves from BoJ, so JPY has strengthened in the wake of the announcement and the stock market has reacted with some disappointment.

The bottom line remains that monetary policy in Japan is now being eased relatively aggressively and the current pace of asset purchases is equivalent to 8% of GDP annually. We expect the asset purchase programme to be expanded further and monetary policy in Japan, in addition to gradually improving risk sentiment, should support a weaker JPY in the coming months.

Asset purchase programme expanded by JPY11trn
At its monetary meeting today, the Bank of Japan announced that its asset purchase programme will be expanded by JPY11trn (2.2% of GDP) to JPY66trn. The target for the purchase of government bonds and treasury bills was raised by JPY10trn, while the target for the purchase of other financial assets including corporate bonds and exchange-traded funds (ETFs) was raised by JPY1trn.

The target for asset purchases by end-December 2012 was unchanged, while the target for asset purchases by end-June 2013 and end-December was raised by JPY3trn and JPY11trn to JPY53trn and JPY66trn, respectively (see table below for scheduled asset purchases). Hence, most of the asset purchases announced today will not have effect until H2 13, which is the main weakness in today’sannouncement.

In addition, BoJ announced a new Loans Support Program (LSP) to stimulate bank lending. This new loan facility will allow banks to finance any net increase in loans at 0.1% interest rate at BoJ for one-, two- and three-year maturities and these loans can be rolled for up to four years. The size of this loan facility is unlimited. To some degree it can be compared to the ECB’s LTRO facility, albeit its use is more limited. More details about this facility will be announced at the next BoJ meeting.

Finally, the target for the O/N money market rate (the leading interest rate in Japan) was left unchanged at 0-0.1%. All decisions were made unanimously by the BoJ board.

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