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October 31, 2014MONETARY POLICY: JAPAN The Policy Board of the Bank of Japan announced it will increase its purchase of assets from an annual pace of 60-70 trillion year to 80 trillion yen. This expansion of the monetary base will primarily be accomplished through increased purchases of Japanese government bonds (whose average term to maturity will also be extended from 7 to 10 years). The Bank of Japan will also purchase about 3 trillion yen of exchange-traded funds and 90 billion yen of real estate investment funds. Existing holdings of commercial paper and corporate bonds will be maintained.
The bank expects Japan's economic recovery to continue with GDP expanding faster than potential growth. However, the bank also identified persistent weakness in inflation after the value added tax increase and falling crude oil prices. The bank's decision to expand its quantitative and qualitative easing reflects risk that short-term downward pressure on prices could delay the abandonment of deflationary expectations, even though these factors may ultimately prove supportive to long-run growth.
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Bank of Japan