UPDATE 5-BOJ to pump $1.4 trln into economy in unprecedented stimulus

Thu Apr 4, 2013 3:26pm 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 policy was viewed as a radical gamble to boost growth and lift inflation
expectations and is unmatched in scope even by the U.S. Federal Reserve's own
quantitative easing programme.
    The Fed may buy more debt, but since Japan's economy is about one-third the
size of the U.S. economy, Kuroda's plan looks even bolder.
    "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 target primarily 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.
    Financial markets liked what they saw.
    The Nikkei stock index jumped 2.2 percent, finishing just shy of a
4-1/2-year closing high, while on Wall Street, U.S.-traded shares of Toyota
Motor rose 4.6 percent.
    The yen fell more than 3 percent against the dollar and 4 percent
against the euro, while the 10-year government bond yield hit a record
low.
    "The result is nothing short of regime change," HSBC's Japan economist Izumi
Devalier said in a report.
    "The BOJ has now made a much firmer commitment to achieving its 2 percent
inflation goal, and has demonstrated that it will do anything short of
foreign-bond buying to achieve this goal."
    Adjusting for gross domestic product, Japan's program will be twice as large
as the Fed's asset purchases, said Stephen Jen, managing partner at SLJ Macro
Partners in London.    "Investors were justified in feeling shocked and awed,"
he said.
    "It may not work but they will go down swinging," added Bill Gross, founder
and chief investment officer at giant bond fund PIMCO, via his Twitter account. 
    
    CAUTIOUS ENDORSEMENT
    Japan's move won cautious endorsements from a few top Fed policymakers, who
said it could help economies around the world.
    Watching Japan struggle to beat deflation and revive an ailing economy "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.
 
    "So their preparedness to take more aggressive action, if it works, will
certainly help everyone," he said. "How it will work or how effective it will
be, it's too early to say." 
    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 on Thursday it
would keep policy loose for as long as necessary to revive the struggling euro
zone economy.
    "I do think the Fed views the move in a favorable light," said Stephen
Oliner, a former senior Fed economist, adding that Fed Chairman Ben Bernanke
"wants the major central banks to support the global recovery".
    But German Finance Minister Wolfgang Schaeuble said Japan's central bank
would not be able to boost growth on its own and urged the government to carry
out structural reforms.
    "If monetary policy is used instead of financial and economic changes then
we run in the wrong way," he said.
    The scope of Kuroda's overhaul presented 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 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."
    The 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.
    
    Unprecedented easing may also provoke a currency war as other Asian
exporters try to stay competitive with a weaker yen.
    Currency traders 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.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
(ETFs) by 1 trillion yen per year and real-estate trust funds (REITs) 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 an 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 the
creation of an asset-price bubble," Kuroda said.
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