UPDATE 4-BOJ to pump $1.4 trln into economy in unprecedented stimulus

Thu Apr 4, 2013 1:09pm EDT

* BOJ changes policy target to base money from interest rates

* Combines bond-buying schemes, targets JGBs across curve

* BOJ to double JGB, ETF holdings in 2 years

* Fed policymakers offer cautious support

* Kuroda get unanimous support from BOJ board

* Kuroda says took all steps BOJ could think of

By Leika Kihara and Stanley White

TOKYO, April 4 (Reuters) - The Bank of Japan unleashed the world's most intense burst of monetary stimulus on Thursday, promising to inject about $1.4 trillion into the economy in less than two years, a radical gamble that sent the yen reeling and bond yields to record lows.

New Governor Haruhiko Kuroda committed the BOJ to open-ended asset buying and said the monetary base would nearly double to 270 trillion yen ($2.9 trillion) by the end of 2014, a dose of shock therapy officials hope will end two decades of stagnation.

The U.S. Federal Reserve may buy more debt under its own quantitative easing program, but since Japan's economy is about one-third the size that of the United States, the scope of Kuroda's "Quantitative and Qualitative Monetary Easing" is unmatched.

"This is an unprecedented degree of monetary easing," a smiling Kuroda told a news conference after his first policy meeting at the helm of the central bank.

"We took all available steps we can think of. I'm confident that all necessary measures to achieve 2 percent inflation in two years were taken today," he said.

One of those steps was to abandon interest rates as a target and become the only major central bank to primarily target the monetary base -- the amount of cash it pumps out to the economy. It adopted a similar policy in 2001-2006, but not on this scale.

Kuroda's first policy meeting since taking office on March 20 was seen as a big test of his ability to steer the BOJ towards unorthodox measures to meet the inflation target it adopted in January, and markets liked what they saw.

The Nikkei stock index jumped 2.2 percent, closing just shy of a last month's 4-1/2 year closing high, while on Wall Street, shares of Toyota Motor rose 4.5 percent.

The yen fell more than 3 percent against both the dollar and euro and the 10-year government bond yield fell to a record low.

A weaker yen aids Japanese companies by making their products less expensive to overseas buyers and should help create price inflation.

CAUTIOUS ENDORSEMENT

Top policymakers at the Fed gave cautious endorsements of the Bank of Japan's move, saying it could help economies around the world.

"Having Japan over the last many years going in and out of deflationary periods and being poised on the knife's edge of deflation and reflation, versus growth, is not a healthy element of the global scene," Atlanta Fed President Dennis Lockhart said on the sidelines of a student investment forum in Ohio.

"How it will work or how effective it will be, it's too early to say," he added.

Charles Evans, president of the Chicago Fed, called the move "pretty aggressive," adding: "I certainly hope that every foreign central bank around the world is able to adopt policies that ultimately lead to the most vibrant economies that those economies can have because we need it around the world."

The Fed and Bank of England have also embraced large-scale bond purchases in an effort to boost growth, while the European Central Bank said Thursday it would keep policy loose for as long as necessary to revive the struggling euro zone economy.

Still, the scope of Kuroda's overhaul offered major risks.

It could leave the central bank heavily exposed to government debt and potentially huge losses if it failed to stoke inflation and investors lost faith in its efforts to revive the economy. It could trigger a currency war as other Asian exporters seek to remain competitive with a weaker yen.

"It is as if we've gone back to the quantitative easing of the 2000s," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management in Tokyo.

"Targeting the monetary base will lead to a huge increase in current account balances that commercial banks keep at the BOJ, but I'm still not sure if this money will move through the economy."

Bill Gross, founder and chief investment officer at giant bond fund PIMCO, noted on his Twitter account that the size of Japan's stimulus relative to the country's total output would be twice as big as the Fed's asset purchase plan.

"It may not work but they will go down swinging," Gross wrote. "Sell yen."

Currency analysts said they expected the dollar, last at 96.19 yen, could hit 100 in the months ahead, a level it last reached four years ago.

Monetary base, or cash and reserves at the BOJ, already hit a record in March, but the huge pile of money has failed to end deflation or boost wages.

PERFECT ANSWER

The BOJ will buy 7.5 trillion yen of long-term government bonds per month, roughly 70 percent of bonds sold in markets. It combined two bond-buying schemes, its asset-buying and lending programme and the "rinban" market operation, to buy longer-dated government bonds, including those with duration of 40 years.

The central bank will also increase purchases of exchange-traded funds (ETF) by 1 trillion yen per year and real-estate trust funds (REIT) by 30 billion yen per year.

"I can say that the BOJ came up with a perfect answer in response to market expectations," said Junko Nishioka, chief Japan economist at RBS Securities.

"Kuroda made good on his promise of boosting monetary easing in terms of both volume and types of assets that the bank purchases."

Kuroda said the BOJ wanted to push down bond yields enough so that investors will start buying riskier assets, such as property and stocks, and to prompt households and companies to spend now rather than later on expectations of rising prices.

The central bank temporarily scrapped a self-imposed rule of capping its holdings of government bonds to the value of bank notes in circulation, despite reservations by some board members that doing so could nudge it closer to monetising public debt -- or directly underwriting government borrowing.

Kuroda brushed aside concerns that excess money printing by the BOJ will sow the seeds of a future asset price bubble, which was repeatedly mentioned by his predecessor.

"I don't see a risk of a sudden spike in long-term interest rates or a creation of an asset price bubble," Kuroda said.

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