Bank of Japan Pledges Unlimited Asset Purchases to Boost Economy, Timing Disappoints

The Bank of Japan late Monday adopted a new, aggressive stance on inflation and asset purchases aimed at stimulating the economy following decades of stagnant growth. The BoJ pledged to purchase unlimited amounts of bonds at a rate of $144.77 billion per month beginning in 2014 in an attempt to boost inflation to two percent.

The move signals the boldest yet by the BoJ to jump start the economy following years of slow to no growth but recently economists and analysts have become optimistic on Japan as the new, stimulative policies are a much broader and larger attempt to provide growth. By increasing inflation and devaluing the yen, the BoJ and other economic authorities in Japan are hoping to boost exports and overall domestic growth.

However, markets were slightly disappointed by the announcement as the new measures will not take place until 2014. The new 2 percent inflation target of the BoJ, although they may informally attempt to boost inflation in 2013, will not take place until 2014, and bond purchases will continue but may not reach the target $144.77 billion per month until 2014. Many market watchers had been expecting these measures to be implemented immediately, and markets were disappointed.

The Nikkei 225 Index declined 0.35 percent overnight following weeks of gains since December on stimulus hopes. However, the disappointing timing of the stimulus set markets back and could be a signal of the beginning of a broader pullback in Japanese equities. The yen has already retraced some of its recent losses over the past few trading sessions.

The USD/JPY recently traded above 90 but has already retreated to 88.76. Further, other yen crosses such as the EUR/JPY and AUD/JPY retraced some gains as the yen strengthened on the negative news.

Another disappointment for markets was the lack of increased easing now. The statement released by the BoJ and the Government merely states that the BoJ will ease to achieve the two percent inflation target, without mentioning the exact methodology for doing so.

However, markets should not fret so much on this detail as the BoJ on December 20, 2012 announced a new round of easing of 1 trillion yen, increasing the size of the asset purchase program by 9.5 percent. Therefore, there is still a strong flow of monetary stimulus flowing into the Japanese economy already, regardless of the lack of new purchases in the statement issued overnight.

A successful move to increase inflation and devalue the yen would boost Japanese exporters. Specifically, Japanese automakers and technology companies would benefit from a weaker yen. Companies such as Honda Motor Corp. HMC, Toyota Motors TM, and Sony SNE.

However, the BoJ must be concerned with the negative effects of such policies. Too much easing could cause runaway inflation which would hurt margins as companies have to continually increase employee wages to meet inflation. Also, currency wars risk locking the nation out from global trade.

The next major announcement which will signal the pace of improvement in Japan will be the appointment of the next leader of the Bank of Japan. Current head Masaaki Shirakawa's term ends in April and the appointment of a pro-stimulus leader who pledges even more stimulative policies would be a positive sign for easing and stimulus efforts.