his party’s victory in Japan’s recent lower-house elections, new Prime Minister Abe has clearly stressed the importance of economic growth – a complete change from the economic policies of the Democratic Party of Japan. The Liberal Democratic Party is showing a strong preference toward using aggressive monetary easing and increased public spending to revive the economy and overcome deflation. Newly appointed Bank of Japan (BOJ) Governor Haruhiko Kuroda, who worked in the Ministry of Finance in early 2000 and intervened in the currency market, has a market-oriented background and supports bold action to fight deflation.
In April, at the first policy board meeting under the new leadership, the BOJ announced a new and simpler framework for fighting deflation. Pledging to achieve its price-stability target of 2% in a time horizon of two years, the bank decided to double the monetary base. The BOJ also extended the average maturity of Japanese government bonds, purchasing bonds with maturities from 3 to 7 years, and announced its intent to make more purchases of exchange-traded funds and real estate investment trusts.
The swift moves clearly impressed the market, and the new governor succeeded in showing that the new BOJ is different. Although we expect the BOJ to monitor progress of the new easing program for the time being, the policies leave the door open for additional action. If the 2% inflation target does not move closer, further easing measures are possible.
As for the yen (JPY), it has depreciated significantly since last November when the ex-prime minister announced that he would dissolve Japan’s Parliament. In 2008, the yen began to appreciate significantly against the euro and US dollar due to their radical balance-sheet expansion and quantitative easing by central banks; this exacerbated deflation in Japan and weighed heavily on the Japanese economy. But from now on, the BOJ will expand its balance sheet aggressively and the JPY will likely depreciate in the longer term. In addition, Japan’s trade balance has run a deficit since the Great East Japan Earthquake, and this situation is not likely to change soon. Even after the recent move, the yen is still well above pre-2008 levels, which indicates significant room for further depreciation.