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Japan central bank revamps policy to boost economy

Thursday - 4/4/2013, 7:48am  ET

People walk in front of the Bank of Japan building in Tokyo Thursday, April 4, 2013. Japan is making a drastic shift in monetary policy in its latest attempt to spur inflation and get the world's third-largest economy out of a long, debilitating slump. (AP Photo/Koji Sasahara)

ELAINE KURTENBACH
AP Business Writer

TOKYO (AP) -- Japan is making a sweeping shift in its monetary policy, aiming to spur inflation and get the world's third-largest economy out of a long, debilitating slump.

Bowing to demands from Prime Minister Shinzo Abe for more aggressive monetary easing, the Bank of Japan announced Thursday a policy overhaul intended to double the money supply and achieve a 2 percent inflation target at the "earliest possible time, with a time horizon of about two years."

BOJ governor Haruhiko Kuroda described the scale of monetary stimulus as "large beyond reason," but said the inflation target would remain out of reach if the central bank stuck to incremental steps.

"We'll adjust without hesitation if need be, while monitoring economic and price conditions," he said.

The BOJ is joining the U.S. Federal Reserve and other major central banks in soaking the economy in money in hopes of getting corporations and consumers to begin spending more in a virtuous cycle that would put growth back on track after two decades of malaise.

The central bank said it intended to "drastically change the expectations of markets and economic entities."

Financial markets, which had feared Kuroda might not live up to expectation for bold steps, reacted with relief. The Japanese yen, which was trading at about 92.8 yen per U.S. dollar, dropped to about 95.5 yen per dollar after the announcement. The benchmark Nikkei 225 stock index rebounded from negative territory to close 2.2 percent higher.

"By committing today to meet a 2 percent inflation target in two years, Gov. Kuroda can justifiably claim to have set the Bank of Japan on a new path," said Mark Williams of Capital Economics.

"But while markets have welcomed the announcement, the credibility of this pledge is soon likely to be called into question," he said in a commentary.

Kuroda has pledged to do what he must to meet the inflation target within two years. Thursday's decision after a two-day policy meeting makes that central bank policy. Signaling a consensus behind Kuroda, most items agreed upon received unanimous support from the nine-member board.

The policy shift is a coup for Abe, whose Liberal Democratic Party needs to make headway in reviving the economy before an upper house parliamentary election in July. The LDP is hoping for a strong enough mandate to push ahead with other items on their wish list, such as politically difficult economic and educational reforms and changes to the constitution to give Japan's military a higher profile.

Economy minister Akira Amari, who attended the policy meeting, praised Kuroda, giving him "very high marks,"

More aggressive monetary easing is a top priority, along with increased public spending to help perk up demand and reforms to make the economy more competitive in the long-run.

Abe had accused Kuroda's predecessor Masaaki Shirakawa, who stepped down on March 19, of balking at undertaking bold enough monetary easing to get the economy back on track. The steps announced Thursday under the first policy meeting chaired by Kuroda exceeded expectations in that regard.

"The first step is to get out of deflation and get a much higher nominal growth rate," Kozo Yamamoto, a senior lawmaker in Abe's Liberal Democratic Party, said Wednesday. A doubling of the money supply was needed to achieve that aim, he said.

The BOJ's policy reforms appear to be a major concession to government demands, despite the bank's ostensible autonomy.

The bank kept the benchmark rate at 0.1 percent. But instead of carrying out money market operations to meet interest rate targets that have long remained near zero, the central bank will focus on the monetary base, or total amount of cash in circulation and bank reserves, raising it by 60 trillion yen to 70 trillion yen ($637 billion to $744 billion) a year. The monetary base stood at 138 trillion yen ($1.45 trillion) at the end of 2012.

The idea is that increasing the amount of cash in circulation will inflate prices, including for assets, encouraging more spending by those who own shares and property.

"If prices don't go up, wages don't go up. If people believe prices will be higher six months from now, then they will believe it's best to buy now rather than later," Abe said in a parliamentary debate Tuesday.

Critics of so-called "Abenomics" say that without wage increases to match the price hikes, many consumers may be even less willing to spend.

Answering concerns that the stimulus program would add to Japan's massive public debt, the statement said the government bond purchases would be "executed for the purpose of conducting monetary policy and not for the purpose of financing fiscal deficits."

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