Bank of Japan Introduces Surprise Stimulus

Governor Haruhiko Kuroda from the Bank of Japan (BoJ) surprised markets after unexpectedly expanding its stimulus program which raised up stocks and depreciated the yen.

Five out of eight board members of the BoJ, including Kuroda, voted to increase the central bank’s yearly target monetary base from the original 60 trillion to 70 trillion yen to 80 trillion yen or $724 billion. According to the BoJ, it will buy additional exchange traded funds in order to increase its outstanding amounts by 3 trillion yen each year. Only three out of the 32 analysts polled by Bloomberg News had expected an expansion of monetary policy.

The decision of the BoJ comes after recent data projected that it may end up missing its target inflation rate of 2% within two years’ time and alongside a Japanese economy still reeling from the effects of a sales tax hike in April. While analysts had long been considering increased action from Kuroda during the past several months, the governor gave no indications about the decision in the days and weeks building up to the announcement.

Following the decision, the Nikkei 225 Stock Average shot up to its highest level since 2007, while the yen declined by 1.7% against the US dollar as of mid afternoon Tokyo time.

An upcoming decision for Prime Minister Shinzo Abe to further raise Japan’s sales tax to 10% in October next year is also believed to also have played a role in Kuroda’s plans since a suspension of the hike could negatively impact confidence on Japan’s fiscal sustainability.

Just hours before, figures showed that inflation in Japan fell to its lowest level in six months in September.  The BoJ then revised down its forecast for its core consumer index for the fiscal year until March 2016 to be at 1.7% instead of the original 1.9%. It sees inflation to be at 2.1% in 2016, unchanged from the earlier outlook.

The bank said that it will be on the path of easing for as long as it takes to stabilize inflation at its desired level.

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