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TheStreet Open House

Bank of Japan Revamps Policy to Boost Economy

TOKYO -- Japan is making a sweeping shift in its monetary policy, aiming to spur inflation and get the world's third-largest economy out of a long, debilitating slump.

Bowing to demands from Prime Minister Shinzo Abe for more aggressive monetary easing, the Bank of Japan announced Thursday a policy overhaul intended to double the money supply and achieve a 2% inflation target at the "earliest possible time, with a time horizon of about two years."

In doing so it is joining the U.S. Federal Reserve and other major central banks in soaking the economy in money in hopes of getting corporations and consumers to begin spending more in a virtuous cycle that would put growth back on track after two decades of malaise.

The central bank said it was launching "a new phase of monetary easing both in terms of quantity and quality" to "drastically change the expectations of markets and economic entities."

Financial markets, which had feared new BOJ Gov. Haruhiko Kuroda might not live up to expectation for bold steps, reacted with relief. The Japanese yen, which was trading at about 92.8 yen per U.S. dollar, dropped to about 94.95 yen per dollar by mid-afternoon Thursday after the announcement. The benchmark Nikkei 225 stock index rebounded from negative territory to close 2.2% higher.

Kuroda has pledged to do what he must to meet the inflation target within two years. Thursday's decision after a two-day policy meeting makes that central bank policy. Signaling a consensus behind Kuroda, most items agreed upon received unanimous support from the nine-member board.

The policy shift is a coup for Abe, whose Liberal Democratic Party needs to make headway in reviving the economy before an upper house parliamentary election in July. The LDP is hoping for a strong enough mandate to push ahead with other items on their wish list, such as politically difficult economic and educational reforms and changes to the constitution to give Japan's military a higher profile.

More aggressive monetary easing is a top priority, along with increased public spending to help perk up demand and reforms to make the economy more competitive in the long-run.

Copyright 2011 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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