NEW YORK (TheStreet) -- The Bank of Japan's latest monetary experiment is one of the most daring in recent times, essentially doubling the country's monetary base by the end of 2014.In the first policy meeting headed by Haruhiko Kuroda, the central bank discussed plans to buy $520 billion (50 trillion yen) in government bonds each year. This figure comes to nearly 10% of annual gross GDP in Japan and will include both long-term government bonds (with maturities as long as 40 years) and assets from riskier categories (such as ETFs and REITs). The aggressive program was announced in an attempt to reverse systemic deflationary pressures and revive growth prospects in a long-stagnant economy.
Markets were expecting additional stimulus announcements at the April meeting but the majority of analysts had a much more limited outlook. To put the Japanese central bank's plans into perspective, we can compare this version of quantitative easing to what has already been implemented by the Federal Reserve. The Fed's plan commits to $85 billion in monthly bond purchases and agency-backed mortgage securities. This comes to roughly 6.8% of the $15.1 trillion gross GDP seen annually in the US, roughly 2/3 of the proposals in Japan.
Defining the BoJ's GoalsThe broad scope of these programs has led some analysts to suggest that these moves amount to outright central-bank funding of the government. But the main reason behind these massive monetary injections is to encourage consumers and businesses to borrow more and to take advantage of lower long-term interest rates.
In theory, this could stimulate business activity as corporations use the extra cash as funding for expansion. At the same time, the hope is that consumers will take the opportunity to buy real estate with the cheaper available cash. With more money injected into the system, the best case scenario would show people spending the extra funds (at cheaper rates), driving consumer demand, and putting upward pressure on consumer prices. The BoJ's commitment now is to achieve a yearly inflation rates of 2%.