Japan Asset Buying Effective in Overcoming Deflation

Bank of Japan Deputy Governor Kikuo Iwata said the central bank hasn’t shifted its focus away from expanding the monetary base as it seeks to reach its inflation target.

Iwata stressed that the BoJ will continue its large-scale asset purchases after it introduced a new policy framework that targets interest rates in September, Bloomberg reported.

“Some argue that the bank’s policy focus has shifted from quantity to interest rates under the new policy framework, but such an understanding is inappropriate,’’ Iwata told local business leaders in Nagasaki on Wednesday.

Iwata’s remarks reflect concern among some at the BoJ that market participants have concluded that the central bank is effectively done expanding asset purchases under its quantitative easing program. Some BoJ officials favored stepping up purchases of government bonds if the board decides it needs to expand stimulus, people familiar with the discussions of inside BoJ told Bloomberg in September.

Any drop in bond purchases will be small for the time being and it’s possible that the BoJ will increase the purchases if bond yields spike, Iwata told reporters after the speech on Wednesday.

In explaining its new framework, the BoJ said it would adjust the volume of its asset purchases as necessary in the short term to control the yield curve, while increasing the monetary base at more or less the same pace of around 80 trillion yen ($701 billion) annually. Asset purchases, especially of JGBs, had been the core of its easing framework.

Many economists viewed the policy shift as a tacit defeat for reflationists in Japan. Some BoJ watchers, including Deutsche Bank AG economists, have said the central bank may begin to taper its buying of Japanese government bonds as soon as next year as it runs into the practical limits of those purchases.

Governor Haruhiko Kuroda has said the BoJ will expand the monetary base until inflation rises above 2%. Lowering the negative rate further and targeting bond yields would be the main options for further stimulus, he has said.

“There is no room for doubt that this policy was effective in overcoming deflation,’’ Iwata said Wednesday. “However, it is true that the price stability target of 2% has not been achieved yet, unfortunately, despite the unprecedented large-scale monetary easing.”

The BoJ will hold a next policy meeting Dec. 19-20.