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Bank of Japan (2): The Meeting on April 4, 2013 (Doubling Japan¡¦s Monetary Base Via Government Bond Purchases)  
 
Product Ref: 13/532C Company: Bank of Japan

Product Type: Case Industry: Banks & Diversified Financials

Related Product(s): Teaching Note
Authors: Mitsuru Misawa   
Shinzo Abe, the current prime minister of Japan, has been promoting various economic stimulus measures¡Xdubbed ¡§Abenomics¡¨¡Xsince taking office in December 2012. So far, his relentless pressure on the Bank of Japan (BOJ) to further ease its monetary policy has had some impact on the markets. It is a combination of monetary relaxation, heavy fiscal spending, and targeted growth strategies. The detailed policies include inflation targeting at a 2% annual rate, correction of the excessive yen appreciation, radical quantitative easing, expansion of public investment, buying operations of Japanese government bonds (JGBs) by the BOJ, and revision of the BOJ Act.

On April 4, 2013, the Japanese parliament approved Haruhiko Kuroda for a full, five-year term as the BOJ¡¦s governor. He officially replaced his predecessor, Masaaski Shirakawa, who stepped down on March 19 before his official term was expected to end on April 8. The new BOJ launched an aggressive easing program in what markets said are surprisingly bold first steps by Kuroda as he begins his campaign to rid the economy of over 20 years of deflation. By taking every currently conceivable measure at once, he is driving home the point that the central bank¡¦s monetary easing has entered a new dimension. The BOJ policy board has thus agreed to a 2% price-rise target at the earliest possible time, with a time horizon of about two years. With this, the BOJ has cut off its own retreat.

The markets have taken the BOJ¡¦s recent decision to set a 2% inflation target as the last big step in the first round of Abe¡¦s policy push. The markets are concerned that government interference and pressure on the BOJ endangers its independence. Also, concerns are being raised that even if these new economic policies being implemented by Abe and the BOJ lift Japan out of deflation, an even more formidable challenge might await the government. The concerns are: higher interest rates, currency war fears, and the appearance of an economic bubble.

It is too early to determine the actual efficacy and validity of the BOJ¡¦s new monetary policy, which is a brave experiment. History will evaluate it later on an ex post basis. But we can study now the details of the BOJ¡¦s decision
Functional Area : Economics & Business Policy
Finance & Investments

Learning Objective: (1)This case will provide students with a better understanding of the role, responsibility, and purpose of a central bank. (2)This case explains the relation between the central bank and the market. (3)This case explains how the measures taken by the central bank help spur growth in the economy. (4)This case explains the fundamental parity relations in equilibrium among inflation rates, interest rates, and exchange rates through various formulas. The students will study how they are interrelated in the markets through various formulas.
Length: 18 pages Country: Japan

Pub. Year: 2013 Level of Difficulty: 3
         
This product type is available in the following language(s):      English
         
Related Information: N/A
 
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