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BoJ renews effort to boost inflation

AAP logoAAP 21/09/2016

The Bank of Japan has surprised the financial world by presenting a new strategy in its long-drawn-out effort to boost the country's inflation rate.

Wednesday's move will shift the bank's focus from massive bond purchases to keeping yields on government bonds at a stable low level.

Low inflation - indeed, often deflation - has dogged Japan's economy for years, leading to a cycle where consumers assume prices will slide lower, meaning they put off purchases, causing demand to drop and prices to lower again. That hurts the general economy, which means less hiring and slower salary growth.

The bank has been trying to push inflation up to a rate of two per cent since 2013. Although it says Japan is no longer in deflation, it has failed to hit the two-per cent level, leaving the world's third-largest economy limping along.

"In order to address this situation, the bank judged it necessary to adopt measures that will raise inflation expectations in a more forceful manner," wrote the bank in a statement.

Until now, the effort to boost inflation has been tied to the bank's massive purchase of bonds held by financial institutions. This puts money into the hands of banks and other groups, which would then, theoretically, pass the funds along to the general economy in the form of investment.

Wednesday's decision would have the bank shift its focus from buying a sum of 80 trillion yen ($A1.04 trillion) worth of bonds each year, to one that focuses on keeping yields on 10-year-bonds at 0 per cent for the long term.

The change would likely mean that bond purchases would remain at about 80 trillion yen annually. However, focusing on keeping the return on bonds at about 0 per cent would, in theory, give the Bank of Japan more flexibility in its efforts.

Keeping bond yields low might also force investors to seek out other investments for their cash - ones which, theoretically, yield higher returns - meaning the policy could have a filip for the broader economy.

The bank would continue to pursue this policy of controlling long-term yields until it forced the inflation rate up to two per cent, the bank said.

"Inflation expectations need to be raised further in order to achieve the price stability target of two per cent," read the bank statement. The bank also noted that its efforts to reach that goal could, at times, force the rate past two per cent.

It also decided to keep its key interest rate at minus 0.1 per cent. The negative rate was introduced in January as a way to prop up the economy by forcing investors to spend money rather than to park funds in accounts where they would have to pay for the privilege.

The decisions were announced at the conclusion of the bank's two-day September meeting.

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