BOJ shocks with new base money target, boosts asset buying...

The Bank of Japan shocked markets on Thursday with a radical overhaul of its policymaking, adopting a new balance sheet target and pledging to double its government bond holdings in two years as it seeks to end nearly two decades of deflation.

At Governor Haruhiko Kuroda's first policy-setting meeting, the central bank shifted its policy target to the monetary base -- the total size of cash and bank deposits -- from the overnight call rate, which is at zero to 0.1 percent.

The decision marks a return to the BOJ's five-year quantitative easing policy that ended in 2006, when it flooded markets with cash targeting excess reserves that financial institutions parked with the central bank.

The scope of the changes Kuroda pushed through, and the fact he secured unanimous board support for them, drove the yen down sharply and knocked the 10-year bond yield to a record low.
The Nikkei stock index unwound losses of more than 2 percent to end up 2.2 percent, just shy of a 4-1/2 year closing high hit last month.

"I can say that the BOJ came up with a perfect answer in response to market expectations," said Junko Nishioka, chief Japan economist at RBS Securities.
"Kuroda made good on his promise of boosting monetary easing in terms of both volume and types of assets that the bank purchases."

To meet its new 2 percent inflation target, the central bank will boost asset purchases to double its holdings of government bonds and exchange-traded funds (ETF) in two years.
In doing so, it will revert to open-ended asset purchases and buy over 7 trillion yen ($75 billion) of long-term government bonds per month, so that the balance of its bond holdings increase at an annual pace of 50 trillion yen.

"The BOJ will conduct money-market operations so that the monetary base will increase at an annual pace of about 60 trillion yen to 70 trillion yen," the BOJ said in a statement announcing the decision.
Despite the market excitement, some analysts were skeptical whether pumping money to markets already awash with excess funds was a solution to end deflation.

The monetary base is expected to expand to 200 trillion yen this year and to 270 trillion yen by the end of 2014, almost doubling from 2012 when it was 138 trillion yen, the BOJ said.
"It is as if we've gone back to the quantitative easing of the 2000s," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management in Tokyo.

"Targeting the monetary base will lead to a huge increase in current account balances that commercial banks keep at the BOJ, but I'm still not sure if this money will move through the economy."
Base money, or cash and reserves at the BOJ, already hit a record in March, but the huge pile of money has failed to end deflation or boost wages.

REGIME CHANGE
Kuroda's first policy meeting since taking office on March 20 was seen as a big test of his ability to steer the BOJ towards unorthodox measures to meet the inflation target it adopted in January, and he did not disappoint markets.

Government bond futures soared and the benchmark 10-year bond yield hit 0.425 percent, its lowest ever. The yen, which had been creeping up in the run-up to the meeting, plunged, driving the dollar up by more than 2 percent to around 95.25 yen from around 92.90 before the decision.
Kuroda has been keen to engineer a "regime change" from his predecessor's cautious approach, pledging to do "whatever it takes" to achieve the 2 percent inflation target in two years, a timeframe many see as overly ambitious.

The BOJ combined two bond-buying schemes, its asset-buying and lending program and the "rinban" bond-buying market operation, to buy government bonds across the yield curve, including those with duration of 40 years.

The central bank will also increase purchases of exchange-traded funds (ETF) by 1 trillion yen per year and real-estate trust funds (REIT) by 30 billion yen per year.
The BOJ strengthened its commitment to ultra-easy policy, saying it will continue aggressive stimulus until 2 percent inflation was sustainably achieved. Previously, it had said it would maintain ultra-loose policy for as long as necessary.

As Kuroda had signaled earlier, the central bank also temporarily scrapped a self-imposed rule of capping its holdings of government bonds to the value of bank notes in circulation. ($1 = 92.8600 Japanese yen)

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News Source: www.reuters.com