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Japan's central bank pledges new stimulus to combat deflation

January 22, 2013|By Don Lee
  • The Bank of Japan announced new steps Tuesday to fight deflation. Above, the central bank's headquarters in Tokyo.
The Bank of Japan announced new steps Tuesday to fight deflation. Above,… (Tomohiro Ohsumi / Bloomberg )

WASHINGTON -- Taking a page from the Federal Reserve's stimulus playbook, Japan's central bank on Tuesday set a 2% inflation target and made an "open-ended" pledge to buy a potentially unlimited amount of government bonds to bolster its long sluggish economy.

While the Fed's focus has been on bringing down America's stubbornly high unemployment rate, the Bank of Japan's new inflation target -- double its previously stated goal of 1% -- is aimed at intensifying its long battle against deflation and economic stagnation.

Japan, the world's third-largest economy, saw negative growth in the third quarter of last year amid flagging exports and weak private spending, and is most likely to report further contraction for the fourth quarter -- technically putting it in recession. Deflation has long been a big part of Japan's economic woes, as a trend of falling prices undermines growth by cutting into consumer spending and business profits, hurting jobs, wages and investment.

The Bank of Japan took the step Tuesday after facing strong pressure from the country's new prime minister, Shinzo Abe, who called the action "bold" and "epoch-making." But the president of Germany's Bundesbank, Jens Weidmann, warned of government infringement in central bank authority and a resulting "politicized exchange rate" that could lead to currency wars as countries look to bolster economic growth through exports.

Some economists doubted that Japan could reach its new inflation target. The country has been in a mild deflation for months, with its consumer price index, excluding food and energy, posting monthly changes of zero to -0.2% since early last year.

The Bank of Japan's pledge to buy assets, known as quantitative easing, will involve total monthly purchases of 13 trillion yen, or about $147 billion, from January next year, most of it in U.S. Treasury bills.

The Federal Reserve in December said it would continue to buy each month $45 billion of Treasury bonds as well as $40 billion of mortgage-backed securities in an effort to hold down long-term interest rates and boost borrowing, spending and investment.

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