Bank of Japan Surprises With More Stimulus

Andrew Klips  |

On the heels of the U.S. Federal Reserve’s decision to introduce a third edition of quantitative easing and the European Central Bank unveiling its own bond buying program, the Bank of Japan’s board unanimously accepted a plan to boost its stimulus efforts to spark its sluggish economy. Wednesday morning the central bank said that it will increase the size of its asset purchases by 10 trillion yen ($126.7 billion) to a total of 80 trillion yen ($1.014 trillion). The plan includes purchases of T-bills and government bonds and is slated to be completed by the end of 2013.

Further, Japan’s main bank left its policy interest rate target unchanged at zero to 0.1 percent. Leading banks across the globe have been aggressively searching for additional solutions to shore-up fragile economic growth on top of keeping key interest rates at historic lows.

Less than one week ago, U.S. Fed Chairman Ben Bernanke disclosed an open-ended bond buying plan, widely referred to as “QE3,” that would entail the Federal Reserve buying $40 billion per month in mortgage-backed securities. The central bank of the States also extended “Operation Twist,” another monetary stimulus scheme that swaps short-term debt into longer-term treasuries designed to keep long-term borrowing costs low.

ECB president Mario Draghi has been vocal in saying that he will do “whatever it takes” to preserve the euro. Early in September, Draghi announced that the ECB’s plans to buy euro zone government bonds and stands ready to commence “outright monetary transactions,” so-called OMTs, in the secondary bond market.
Markets tend to respond favorably to news of economic stimulus. The Japan’s Nikkei closed ahead by 1.8 percent, Hong Kong’s Hang Seng advanced 1.3 percent, South Korea’s Kospi edged up 0.3 percent and Australia’s S&P/ASX 200 climbed 0.5 percent upon the release.

Investors will now be looking to China, whom already announced infrastructure projects on September 6 and 7 to grow its economy, to follow with additional monetary easing. China, the world’s second largest economy, has released a raft of data showing continued economic weakness, including a report from Beijing on Wednesday detailing a 1.4 percent drop to $8.33 billion in foreign direct investment in August. It was the ninth decline in the last ten months and highlights a spat between China and Japan over ownership of neighboring islands as well as global growth concerns. China’s economy is on track to grow the least amount in 22 years.

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