To infinity and beyond – BoJ joins peers on QE bandwagon

The Bank of Japan (BoJ) arrived late to the ‘QE infinity’* party this week, when it announced it had doubled its inflation target to 2% and would be undertaking a policy of unlimited bond buying from 2014 in order to meet it. Currency effects leading up to the announcement have not gone unnoticed, however, triggering criticism from its trading partners. Newly-elected Prime Minister Shinzo Abe’s call for more aggressive money easing has been the principle driver behind the 10% and 14% decline in the yen versus the dollar and euro, respectively, since November.

The president of the Bundesbank, Jens Weidmann, has warned that the infringement of the Bank of Japan’s independence could lead to the “politicisation of the exchange rate”, whilst Bank of England Governor Mervyn King voiced concerns about potential “competitive devaluations” – currency wars – between major global economies. Elsewhere, Michael Meister, a senior member of Germany’s governing Christian Democratic Union is thought to be seeking help from fellow G20 members to urge Japan to change course, describing its moves as “very worrying”.

On the other side of the coin, Japanese policymakers have been battling with the adverse effects of Japan’s ‘burst bubble’ for two decades; their attempts to boost the domestic economy and reverse consumer-price deflation are understandable. And with the US Federal Reserve and European Central Bank already pledging potentially unlimited bond-buying to support their own jurisdictions, it seems somewhat unfair to deny Japan the opportunity to join its peers on the QE bandwagon.

*potentially unlimited quantitative easing