Hard on the heels of the US Federal Reserve’s announcement that it was implementing a third round of quantitative easing and the European Central Bank’s pledge to support the bonds of Eurozone states in receipt of an EU/IMF bailout should borrowing costs become unrealistic, the Bank of Japan has announced further measures it will take to stimulate the Japanese economy.
Japan remains the world’s third largest economy, but as its economic strength derives from the goods that it exports to the rest of the world; it is being hard hit by the weakness of the global recovery and the fact that the Japanese currency is trading near historic highs against major currencies. The rise of the Yen has as much to do with frailties in other currencies such as the Euro and the US Dollar as with Japan’s reputation as a currency safe-haven. However, the consequence is that Japanese goods are significantly more expensive in importing markets than they were before the onset of the global financial crisis.
The Bank of Japan is to extend its asset purchase programme by a further 10 trillion Yen (some $126 billion). The money will be used to keep the cost of borrowing down and is intended to stimulate the economy by enhancing liquidity in the financial sector. The bank kept its interest rate policy unchanged meaning that rates lie between zero and 0.1%. Again, the idea behind this policy is to ensure that “cheap” money is available to business and consumers are encouraged to spend money rather than hold it on deposit where it earns next to nothing.
The initiative had been expected by analysts, but the scale was larger than many had expected. Markets reacted positively to the news and the Yen lost ground against other major currencies. As a consequence of the global financial and European sovereign debt crises, the Euro has declined from a high of 169.75 (July 2008) to a minimum of 94.63 (this July) Yen to a Euro. It has recovered to 102.64 over the past month and a half.