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How bold (or timid) has Japan been with 2% inflation target?

by Dylan Lobo on Jan 22, 2013 at 08:05

How bold (or timid) has Japan been with 2% inflation target?

Japan has agreed to double its inflation target to 2% but there was surprise in its commitment to offer open-ended asset purchases.

Analysts had been expecting a relatively more cautious incremental capital injection of 101 trillion (£706 billion) yen from the Bank of Japan (BoJ). In practice the intention will see the Bank consume financial assets on a monthly basis until the inflation target is hit.   

However, as ever the devil is in the detail and judging by the reaction of the stockmarket traders believer the BoJ fell short. After an initial spurt of 0.8%, the market gave up its gains to close down 0.4%.

The decision to set a more definitive inflation target was widely anticipated. Previously the BoJ had been vague, setting inflation target within a range of 0%-2%.

However, the Bank offered little clarity as to when it hopes to hits its target, simply saying it hopes to achieve it 'at the earliest possible date'.

'Committing to achieve 2% inflation anytime soon is ambitious,' Capital Economics chief global economist Julian Jessop said in a statement. 'But the vague time horizon makes that commitment much less bold'.

Jessop also sees the 'open-ended asset purchasing method' as a little timid to, especially given the fact it will not actually not introduced until January 2014 when purchases under the current Asset Purchase Program (APP) are completed.

On closer inspection Jessop finds that there is less conviction at the BoJ than initially appears.

'While the monthly target for 2014 has provisionally been set at ¥13 trillion, the bulk of these purchases will be short-dated Treasury bills with only ¥2 trillion in JGBs. As a result, allowing for the maturing of assets already purchased, the net increase in the APP for 2014 as a whole is only put at ¥10 trillion,' Jessop points out.

'It is debatable that the new "open-ended" easing will result in any more asset purchases than would have happened anyway under the current policy of steadily increasing the ceiling on the APP. Indeed, the Bank failed to announce any new purchases for 2013, today at least.'

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