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Bank of Japan’s Stimulus Program: Tough Times Call for Tough Measures

On April 4, 2013, the Bank of Japan unleashed its most radical stimulus program of injecting around $1.3 trillion over next two years, committing to open-ended asset buying and nearly doubling the monetary base to $2.9 trillion by the end of 2014. The aim is to end 15 years of stagnation and set a goal of 2 percent inflation in next two years.

While the financial markets buzzed on the news with the Nikkei stock index jumping 2.2 percent and almost touching a 4-1/2-year closing high, the Yen plummeted more than 3 percent against the dollar and 4 percent against the euro. The 10-year government bond yield hit a record low. The Japanese Yen has declined to the lowest level against the dollar since 2008 and some analysts say investors are attracted to even the relative stability of the Euro.

bank-of-japanAs with every radical move, this intent from the Bank of Japan also had some sharp reactions on whether it will really work. Some analysts said this will result in a correction in the markets worldwide and could result in large outflows from Japan into other markets.

On the other hand, IMF managing director, Christine Lagarde has welcomed Bank of Japan’s reforms. In a speech at the Boao Forum for Asia Annual Conference, China she said, “Monetary policies - including unconventional measures - have helped prop up the advanced economies, and in turn, global growth. The reforms just announced by the Bank of Japan are another welcome step in this direction.”

Financial regulatory bodies round the world have their job cut out and some have started tightening their belts. The Bank of Japan’s move could influence the recovery strategies around the world.