The Bank of Japan announced on Thursday a plan to expand the money supply through significant and sustained long-term bond purchases. This step was more or less expected as part of Japan’s new, more accommodative economic plan, the so-called Abenomics–following from the name of the recently elected Prime Minister, Shinzo Abe.
In contrast to the austerity policies spreading throughout the EU–which don’t seem to be working–Abe came into office with a plan for big stimulus spending. Japan has been plagued by deflation for almost two decades, and the economic woes are certainly apparent in a historical chart of the Nikkei 225:
As in the U.S., the zero bound for overnight interest rates has constrained the central bank, and now Japan is following our lead by pursuing a strategy of quantitative easing. In fact, buoyed by the relative success of QE here in the States, Japan will be doing it bigger. As the FT reports:
Under the new measures, the BoJ will expand its balance sheet by 1 per cent of gross domestic product each month this year and by 1.1 per cent per month in 2014, according to estimates from Barclays.
By comparison, the US Federal Reserve’s current monetary easing programme involves increasing the balance sheet by 0.54 per cent of GDP per month.
“This is really taking policy where it hasn’t been before”, said Jonathan Cavenagh, senior FX strategist at Westpac in Singapore. “It’s pretty bold. It has certainly taken us by surprise.”
The Nikkei gained about 2.2% on the news, but it remains to be seen how the policy turns out on the whole. Either way, it will be good to have some more comparative data to help determine the effects of QE on developed economies.