A Rattled BOJ Rightly Responds

The Bank of Japan has clearly been rattled by the setback to the economic recovery associated with April's consumption tax hike to 8% from 5%.  The Tankan survey of business sentiment has since declined, nominal GDP posted its first quarterly decline since mid-2012 and the core CPI has stalled for the first time this calendar year.

In a narrow majority decision, the BOJ voted to accelerate growth in the monetary base by no less than 20% per annum compared with the past, and scale up its purchases of JGBs by around 60% per annum.  The scale of the expansion in the BOJ's quantitative easing is ambitious but justified in light of the faltering recovery. 

The expansion of its program of QE should be welcomed by investors given the unambiguous success that the more aggressive conduct of monetary policy has had since the inception of Abenomics in: ending deflation, boosting inflation expectations, underpinning yen weakness, raising the level of nominal GDP (although it remains well below its pre-GFC peak) and boosting the stock market primarily through analyst upgrades to corporate sector profitability (see charts).

The BOJ is clearly looking ahead to the next consumption tax hike to 10%, slated for October 2015, and will remain proactive in ensuring that monetary policy will help to offset any renewed weakness in sentiment and aggregate demand.

The BOJ's expansion of QE is a timely reminder that it remains committed to achieving its price stability target of 2%pa, that global liquidity will continue to be abundant and that the yield trade has not yet run its full course.