Bank of Japan steps up QE in deflation war

THE YEN fell against the dollar yesterday after the Bank of Japan announced a 10 trillion yen (£81bn) expansion of its asset purchase program.

Despite years battling deflation, it is the first time the central bank has stated an explicit inflation target.

It now aims for consumer price inflation of one per cent.

The monetary loosening pushed the dollar to three-month highs of as much as ¥78.37.

“We will be buying massive amounts of government bonds,” said governor Masaaki Shirakawa.

“This is designed to achieve sustained economic growth under stable prices.”

The 10 trillion in quantitative easing (QE) will be spent entirely on long-term Japanese government bonds, and yields fell slightly on government debt of all maturities from one year upwards.

Analysts expect more to come from the central bank. The easing “played up concerns about the outlook for the Japanese economy; that could keep the door open for further easing down the road”, said Joe Manimbo, senior market analyst with Travelex Global Payments.

“The Bank of Japan has many battles to fight with deflation having eroded confidence over the past two decades and the strong yen biting at the competitiveness of its exporters,” said Chris Towner, director of HiFX.

“It knows its issues; however the Bank has lacked the confidence in the past to attack them with bold action, but recently we have seen them stepping up in the size of their foreign exchange interventions and now targeting a one per cent inflation rate as well as boosting their asset buying programme. Japan seems to be preparing itself for a big battle.”

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