BOJ massive monetary easing set to continue with pros, cons

October 28, 2017

TOKYO- The landslide victory of Japanese Prime Minister Shinzo Abe's ruling coalition in the latest general election is set to allow the Bank of Japan to continue its massive monetary easing policy, bringing relief and caution among Japanese market players.

Some Japanese stock investors were relieved that the Abe-led Abenomics economic policy mix, which includes the BOJ policy, won the support of voters in the election for the House of Representatives, the all-important lower chamber of parliament.

The benchmark 225-issue Nikkei average rose for a record 16 straight sessions through Tuesday on the Tokyo Stock Exchange and closed above 22,000 on Friday for the first time since July 1996. The brisk market was partly supported by the BOJ, which spends 6 trillion yen annually for exchange-traded fund purchases as part of its monetary easing efforts.

During the campaign for the Lower House election, the Party of Hope, created by Tokyo Governor Yuriko Koike, vowed to seek an exit from the BOJ's large-scale monetary easing policy. But the pledge is no longer a factor, after the new national political party fared poorly in the general election, while Abe's Liberal Democratic Party and its coalition partner, Komeito, captured a two-thirds majority in the Lower House.

The central bank will continue its monetary easing policy in order to attain its 2 pct inflation target, according to a senior official of the BOJ.

At a two-day policy-setting meeting through Tuesday, the BOJ will adopt its quarterly Outlook for Economic Activity and Prices report, which will be released after the meeting. In the report, the BOJ is expected to lower slightly the projection for year-on-year growth in the core consumer price index for fiscal 2017, which ends in March, from 1.1 pct, due to the current sluggish pace of price increases, and maintain its monetary easing policy framework featuring yield curve control.

It is highly likely that the BOJ will keep unchanged its estimated date for achieving its 2 pct inflation goal at around fiscal 2019.

Meanwhile, concerns have grown that prolonged large-scale monetary stimulus measures may weaken Japan's fiscal discipline.

There are also persisting worries over erosion of the functioning of the Japanese bond market as the proportion of Japanese government bonds held by the BOJ has grown to 40 pct of all outstanding JGBs on the back of massive purchases under its monetary easing policy.

Before the election, Abe told a press conference that the government will postpone its goal of returning the primary budget balance to a surplus by fiscal 2020. A surplus means that a government can finance its spending on policy measures, except for debt-serving costs, without issuing new debt.

Both ruling and opposition parties discussed few measures for restoring fiscal soundness during the election campaign, suggesting that they have less of a sense of crisis over the current situation, analysts said. Jiji Press