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Dec19 2014, 9.55am GMT


At the Bank of Japan Monetary Policy Meeting held today, guidelines for money market operations were agreed.

The BOJ, through the Statement on Monetary Policy, confirmed this morning that it will increase the monetary base at an annual pace of about 80 trillion yen through a specific programme of QQE. The hope is that the economy will revitalize on a cycle of QE and asset purchases, leading to higher wages, which will then encourage consumer confidence and spending.

As Shinzo Abe gains a new mandate after his recent reelection as president, he is now able to work with the Bank of Japan to enforce the plan that he sees achieving the goal of 2% core consumer inflation. The country has been on a downtrend to deflation for 15 years, hitting a technical recession this month.

In anticipation of the BOJ release on policy today, the Japan225 [Nikkei] has been rising since Tuesday, pushing up from 1652 to 1782. At the same time the USA500 [S&P] rose on the back of Janet Yellen’s speech from the US FED as she explained that interest rates would not be due for at least another two FED meetings, well into 2015. USA500 pushed from Tuesday’s 1961 to 2068 today.

MT4 chart: Japan 225

Japan225 on STOCK.com

MT4 chart: USA500

USA500 Nikkei on STOCK.com

The details of the BOJ statement are as follows:

The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen. With a view to encouraging a decline in interest rates across the entire yield curve, the Bank will conduct purchases in a flexible manner in accordance with financial market conditions. The average remaining maturity of the Bank's JGB purchases will be about 7-10 years.

The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 3 trillion yen and about 90 billion yen respectively.

As for CP and corporate bonds, the Bank will maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen respectively.

Japan's economy has continued to recover moderately as a trend, and effects such as those of the decline in demand following the front-loaded increase prior to the consumption tax hike have been waning on the whole. Overseas economies -- mainly advanced economies -- have been recovering, albeit with a lackluster performance still seen in part. In this situation, exports have shown signs of picking up. Business fixed investment has been on a moderate increasing trend as corporate profits have improved. Public investment has more or less leveled off at a high level. Private consumption has remained resilient as a trend with the employment and income situation improving steadily, and the effects of the decline in demand following the front-loaded increase have been waning on the whole. Housing investment, which continued to decline following the front-loaded increase, has recently started to bottom out. Against the backdrop of these developments in demand both at home and abroad, industrial production has started to bottom out, due in part to the progress in inventory adjustments. Business sentiment has generally stayed at a favorable level, although some cautiousness has been observed. Meanwhile, financial conditions are accommodative. On the price front, the year-on-year rate of increase in the consumer price index (CPI, all items less fresh food), excluding the direct effects of the consumption tax hike, is around 1 percent. Inflation expectations appear to be rising on the whole from a somewhat longer-term perspective.

With regard to the outlook, Japan's economy is expected to continue its moderate recovery trend, and the effects such as those of the decline in demand following the front-loaded increase prior to the consumption tax hike are expected to dissipate. The year-on-year rate of increase in the CPI is likely to be at around the current level for the time being.

Risks to the outlook include developments in the emerging and commodity-exporting economies, the prospects regarding the debt problem and the risk of low inflation rates being protracted in Europe, and the pace of recovery in the U.S. economy.

Quantitative and qualitative monetary easing (QQE) has been exerting its intended effects, and the Bank will continue with the QQE, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will examine both upside and downside risks to economic activity and prices, and make adjustments as appropriate.

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