The Bank of Japan is boosting incentives with the promise of endless bond purchases

The Central Bank of Japan (BoJ) announced that it will buy as many government bonds as it needs and boost corporate debt purchases, adding additional incentives after Prime Minister Shinzo Abe’s government declares a nationwide emergency because of the coronavirus.

The extraordinary measures have led to the cessation of activities of a number of business representatives, which has increased the need for financial support.

By neglecting the guidelines for increasing the national debt by about 80 trillion JPY (743 billion USD) annually, the ECB no longer has restrictions on purchases at a time when the government plans to issue new bonds to finance record-breaking incentives.

“The government and the ECB are really stepping up political coordination”, said the Japanese Economy Minister Yasutoshi Nishimura.

The market reaction was mixed. Tokyo’s blue-chip index Nikkei 225 ended the session with a 2.7% gain. The Japanese currency rose against the dollar to 107.18 yen per dollar.

The Bank of Japan has been under increasing pressure to expand unprecedented monetary stimulus as the spread of COVID-19 continues to cast a shadow over the normal activity of the global economy. The ECB is also likely to see the need for additional action, with the Federal Reserve and the European Central Bank (ECB) also expected to vote on additional support for the economy during this week’s meetings.

However, the question remains how the decision today will actually change the purchases of bonds, as in recent years the rate of purchase of the central bank has remained far from this level. The current yield curve control program does not require an increase in purchases, while yields on 10-year bonds remain around zero, so eliminating the numerical purpose adds flexibility to buy more bonds in the short and long term.

Supporting the business

The BoJ increased its scope for buying corporate bonds and trading securities to 20 trillion JPY. This action is aimed at easing the financial conditions for companies across the economy, as emergency measures across the globe have seriously affected demand everywhere.

The BoJ has also expanded access to its emergency loan program to a wider range of banks. According to the forecast of the ECB, the level of inflation in the country will be at the level of minus 0.7% for the 12 months to March 2021.

With additional measures focused largely on supporting companies seeking financing, the BoJ has maintained its short- and long-term interest rate objectives unchanged. The return to relative stability in the stock markets and the diminished concern about the possibility of a sharp appreciation of the yen has given the ECB some peace of mind to leave its main interest rate levers untouched.

Policy Coordination

Additional measures announced by BoJ Governor Haruhiko Kuroda show better coordination of fiscal policy after Prime Minister Shinzo Abe presented incentives for more than 1 trillion USD earlier this month and an accompanying plan to issue more bonds.

In its quarterly report on economic forecasts, the BoJ significantly reduced its outlook by March 2023, indicating that it expects a contraction of up to 5% this fiscal year. The bank estimates that inflation will be at just 0.4%.