TOKYO: The Bank of Japan’s surprise move to inflate its already huge stimulus program exposes the cracks in Tokyo’s plan to conquer deflation and boost growth, economists say, but it may give the government room to hike sales taxes again.
On Friday, the central bank said it would widen its asset-buying plan by as much as 20 trillion yen ($182 billion), bringing it to an eye-popping 80 trillion yen annually, sending the yen into a freefall and stocks soaring.
The BoJ also halved its annual economic growth forecast and trimmed consumer price expectations as a much-touted inflation target looks increasingly out of reach and Premier Shinzo Abe’s plan to kickstart the economy stalls.
“The move by the BoJ shows that Abenomics is facing big problems. The economy is not growing, and is not showing the power to grow,” said Ivan Tselichtchev, an economics professor at Japan’s Niigata University.
“Thus the government and BoJ again have to resort to monetary alchemy. Again, it will have a stimulating effect, but only in the short term.”
Friday’s decision also threw into focus the sharp contrast of fortunes for the US and Japanese economies after the Federal Reserve last month brought an end to six years of bond-buying and is now considering an interest rate hike.
The move—which is an attempt to stimulate growth by pumping massive amounts of money into the economy—is the first since the bank unveiled the unprecedented easing scheme in April last year.
The program—and a target of 2.0 percent inflation by next year—were cornerstones of the government’s wider platform to turn around years of deflation and kickstart the economy.
On Wednesday, BoJ governor Haruhiko Kuroda again pledged the central bank will do whatever it can to achieve the goal.
“In order to completely overcome the chronic disease of deflation, medicine should be taken until the end,” he told private- and public-sector officials in Tokyo.
“A half-baked medical treatment will only worsen the symptoms,” he said.
When the program was launched, Abe’s revival plan was cheered by some and it seemed to be working well—sending the yen tumbling against the dollar and the stock market surging to a six-year high by the end of 2013.
But critics derided it as a money-printing exercise that would leave Japan in a bigger financial hole. It already has the heaviest debt burden among rich nations at more than twice the size of the economy—a figure that will expand as a rapidly ageing population strains the public purse.
And earlier this year “Abenomics” hit a wall as months of weak indicators were compounded by the introduction of the country’s first sales tax hike in 17 years.
As consumers stopped spending the economy shrank an annualized 7.1 percent in April-June, and with the latest data also looking poor, there are fears of another contraction in July-September, which would put the economy in technical recession.