Bank of Japan takes on deflation

Japan central bank has launched a more aggressive monetary policy to pull the county’s shrinking economy out of the deflation it has struggled with for almost 20 years.

It is boosting its programme of buying government bonds by the equivalent of 97 billion euros and has set an inflation target of one percent.

Shares rose in Tokyo and the yen weakened against the dollar, but some economists complained the bank has bowed to political pressure.

This comes after government calls for action and the worry is that policy easing will undermine the central bank’s independence.

It would also leave it open to further pressure from lawmakers, especially if more aggressive US monetary stimulus exerts fresh upward pressure on the yen.

“The BOJ apparently bent to political pressure, leaving the market with the impression of its vulnerability,” said Yuichi Kodama, an economist at Meiji Yasuda Life Insurance.

“If the Fed embarks on additional easing, the BOJ is likely to come under pressure again and again and it may tweak its asset purchase scheme and start buying government bonds with longer maturities.”

Most central banks set inflation targets to anchor expectations and prevent prices from rising too quickly. In Japan’s case, an inflation goal will act as an incentive to pursue more aggressive easing to stop prices from declining.

Core inflation fell in 2011 for the third straight year.

The Fed last month took a historic step of setting an inflation target and extended its commitment to near zero rates, leaving the door open to more easing that could further weaken the dollar and put the yen under renewed upward pressure.

The yen rose to record highs against the dollar last year, which hit exports and sparked a wave of corporate calls for official action as well as prompting unilateral currency intervention by Japan on October 31.

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