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BOJ keeps new monetary easing measures to a minimum, but gov't looks for more

Additional easing unveiled by the Bank of Japan (BOJ) on July 29 went no further than increasing its purchases of exchange-traded funds (ETFs). The BOJ went ahead with the limited move as a last-ditch measure to keep pace with the government's huge economic stimulus package aimed at getting Japan out of deflation.

It was a world apart from BOJ Governor Haruhiko Kuroda's previous easing policies, which have been described as "bazookas." With no immediate prospect of being able to achieve a 2 percent inflation target, it appears that the central bank is coming under pressure to start evaluating the effectiveness of over three years of its so-called "different dimension" of monetary easing.

On July 27, the day before the BOJ held a meeting to determine its fiscal policy, Prime Minister Shinzo Abe outlined plans for an economic stimulus package of over 28 trillion yen. Following his announcement, a member of a government agency expressed hope for additional easing from the central bank, saying, "The outer moat has been filled. The BOJ should change the atmosphere of financial markets."

Since the beginning of this year, the yen has strengthened and stocks have declined amid uncertainty over the direction of the global economy, while consumption and commodity prices have slumped. Ahead of the July 10 House of Councillors election, the Abe administration pledged to reboot its Abenomics economic policy mix through large-scale economic measures. But on June 24 Japan time, in the midst of the election campaign, it emerged that Britain had voted to leave the European Union. The yen, seen as a relatively stable currency, rose to a 2 year, seven month high of 99 yen to the U.S. dollar, sending stock prices tumbling.

Fearing Abenomics could stall, the government has strongly urged the BOJ to go ahead with additional monetary easing. As meetings on July 28 and 29 to decide on fiscal policy approached, Finance Minister Taro Aso said he had "strong expectations that the BOJ will continue efforts to its utmost ability," while Minister of State for Economic and Fiscal Policy Nobuteru Ishihara commented, "The government and BOJ need a sense of unity. I think Gov. Kuroda is aware of this of course."

Kuroda has maintained bold easing measures since the introduction of a "different dimension of easing" in April 2013, creating an unusual situation in which it has openly accepted requests from the government for additional easing -- probably for the first time. This time, the BOJ considered for several days whether there was anything it could do, mulling more easing. But it has already implemented easing on an unprecedented scale over the past few years, and there was a strong view within the central bank that it has done enough already.

Kuroda has hitherto urged the government to implement fiscal reconstruction, partly in preparation for when the central bank ends easing and stops buying government bonds. But with no prospect of Japan emerging from deflation, there is speculation from those close to the prime minister that the government will push for so-called "helicopter money," in which the BOJ's money is used to underwrite government spending.

Overseas media outlets have reported that Kuroda has ruled out the idea of using "helicopter money," saying there is "no need and no possibility of it." But expectations have spread within financial markets that it could be adopted as an additional easing method.

Regardless of the method, there existed fears that if the BOJ withheld additional easing, then the value of the yen could surge, pushing down the value of stocks. This drove the central bank into a position where it had to do something.

When the BOJ first introduced its "different dimension" of quantitative and qualitative easing, Kuroda denied that the bank would introduce easing measures in installments, but this time the BOJ went no further than deciding to increase its purchases of ETFs. During a news conference on July 29, Kuroda explained, "Taking necessary and sufficient measures as required from time to time is to produce the greatest possible effect of monetary policy." In markets, however, a view is spreading that this move has exposed limits to the BOJ's monetary policy.

In the meantime, the government has highly evaluated the increased purchase of ETFs, which support stock markets. On July 29 Aso said, "I understand that it was decided on as a necessary measure to achieve a price stability target, amid uncertainties in overseas economies and international money markets, and I welcome it on behalf of the government."

It is extremely rare for the finance minister to make such a comment on central bank monetary policy.

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