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Japan Takes Massive Stimulus Actions

TOKYO—Japan’s central bank and its main government pension fund said Friday they would pump trillions more yen into the country’s sputtering economy, taking a risky new stimulus tack that jolted global markets.

Faced with fresh evidence that Prime Minister Shinzo Abe’s campaign to end the country’s long bout with deflation was faltering, the two institutions steered Japanese economic policy into the uncharted territory of extreme stimulus that appeared to go even beyond the often radical measures taken by other advanced economies in recent years. The Bank of Japan’s board was deeply divided over the unprecedented measures.

The fresh injection of liquidity from Tokyo into global markets—coming at a time when investors have grown nervous about the prospect of the U.S. Federal Reserve tightening its policy—led the Dow Jones Industrial Average and the S&P 500 index to record closes on Friday.

In Tokyo, the Nikkei Stock Average jumped nearly 5% on heavy volume, bringing the index to its highest level since late 2007, while the yen fell to its lowest value against the dollar in almost seven years. Investors said the Japanese move put new pressure on central banks from South Korea to Europe to follow suit with their own increased stimulus.

Officials said the central bank and pension moves weren’t coordinated, but they shared the goal of pushing the reset button for global investors who have soured on Abenomics in recent months. “In our view, it is no coincidence,” said Naohiko Baba, chief Japan economist at Goldman Sachs.

“All the available measures of Abenomics were mobilized today,” said Deutsche Bank strategist Taisuke Tanaka.

After months of saying its big easing campaign unleashed last year would be sufficient to lift Japan’s economy, the Bank of Japan announced Friday it would expand its asset-buying program by as much as 33% and buy not just more government bonds, but also stocks and real-estate funds.

The “historic experiment” means the central bank will be buying on the market the equivalent of more than twice the amount of new bonds issued by the government, J.P. Morgan said in a report, a level well beyond what the Federal Reserve and other central banks have purchased in their stimulus programs. That has raised concerns that the BOJ is effectively underwriting Japanese politicians’ heavy borrowing, threatening to undermine the credibility of its public finances, and the perceived independence of the central bank.

Later in the day, the welfare ministry gave details of a long-awaited plan to shake up the $1.2 trillion investment portfolio for the Government Pension Investment Fund. It said it would raise the share of its assets in Japanese and foreign stocks by more than 10 percentage points each, in a bid to improve returns for Japan’s rapidly growing population of retirees.

Despite the celebration in the markets, there was dissension. Bank of Japan Gov. Haruhiko Kuroda, who generally wins unanimous support from his policy board, barely pulled out a last-minute majority this time, winning approval by a 5-to-4 vote. BOJ officials and private watchers of the institution said they couldn’t recall such a closely divided vote in the central bank’s history.

“We are at a critical moment,” Mr. Kuroda said in explaining his move. “There is a risk” that victory over deflation “may be delayed.”

Much the way European Central Bank President Mario Draghi famously declared two years ago that he would do “whatever it takes” to preserve the euro, Mr. Kuroda vowed Friday to reach his goal of eradicating what he calls “the deflationary mind-set” he feels saps Japan’s vitality.

But the open rift at the Bank of Japan and the sudden policy shift—after Mr. Kuroda said repeatedly in recent weeks that Japan’s recovery was on track—could affect his credibility. And his admission that the stimulus so far was losing its punch led some critics, both inside and outside the central bank, to question whether it would help much to do more of the same. The dissenters “considered that it was appropriate to maintain” current policy, said an official statement after the meeting.

“We think that the prospective expansion will not meaningfully change the inflation outlook,” Credit Suisse economist Hiromichi Shirakawa wrote in a note to clients, adding that the move “may cause accountability and communication problems.”

The pension shift has also stirred some controversy, including suggestions that the government is moving as much to prop up the stock market as to protect retirees. “It’s very surprising,” said Robert Waldner, chief fixed income strategist at Invesco Ltd. “Most global pension funds are paring back risk at this point, not adding risk.”

The new measures come at a sensitive time not just for Japan’s economy, but also for its politics. Mr. Abe’s popularity, once supported by his economic program’s early successes, has slipped below the 50% level in recent polls, which also showed few Japanese felt they were enjoying gains from Abenomics. And his once-stable cabinet has been rocked in recent weeks by a series of scandals, prompting two ministers to resign.

Mr. Abe took office in December 2012 and introduced his “three arrows” of economic changes—monetary stimulus from Mr. Kuroda, his handpicked central bank chief; public-works spending; and structural overhauls. Markets rallied, growth revived and last year Japan seemed well on its way to escaping the trap of economic stagnation and falling prices.

More recently, though, the growth spurt ended after the government raised the national sales tax in April to 8% from 5%. That drove down real wages and the confidence of consumers who were paying more at the cash register without seeing a corresponding rise in income. The BOJ Friday halved its forecast for gross domestic product growth for the fiscal year ending next March to an anemic 0.5%.

Most ominously for the BOJ, its bid to rid Japan of deflation—the vicious cycle of falling prices, wages, spending, and investment seen as the root cause and symptom of Japan’s woes—has been losing momentum.

Bank of Japan Governor Haruhiko Kuroda announces new stimulus measures on Friday in Tokyo. © Provided by The Wall Street Journal.

Shortly before the policy board gathered Friday, the government said the most closely watched gauge for inflation had fallen to 1% in September, well short of the central bank’s 2% target and a deceleration from the 1.5% pace hit earlier this year. One reason was the fall in oil prices, which lowered gasoline prices.

The central-bank chief has a penchant for surprise moves to get maximum impact on the markets, and he got his way this time: Only two of 13 economists polled by The Wall Street Journal had expected action.

In shocking markets with the central bank and pension moves, Messrs. Kuroda and Abe appear to be turning back to the early Abenomics playbook, which rested heavily on seeking quick economic and financial gains from weakening the yen against other major currencies. Central bank stimulus tends to drive down the value of a nation’s currency by boosting the supply of it. The pension fund is, among other things, dumping Japanese yen-based assets for overseas assets, another shift that weakens the yen.

The weak yen gives a quick boost to inflation, by raising the cost of imported goods, and is more broadly seen as helping the economy by making Japanese-made products cheaper on world markets and lifting exports. But the sharp yen devaluation that took place last year after Mr. Kuroda’s first big easing failed to have that effect, as many Japanese manufacturers had shifted production offshore during the country’s period of slow growth. The muted benefits of the weaker yen were one reason that some in the BOJ and elsewhere questioned the wisdom of further easing, because Japanese might face higher costs without higher exports.

Some BOJ dissenters have also argued that it is simply not possible, given Japan’s long history of low prices, to retool the economy quickly enough to reach 2% by Mr. Kuroda’s two-year timetable, and that it hurts to central bank’s credibility to make such a promise. Others worry about the difficulty the BOJ will face when it eventually reaches the point where it will have to pull back from its big asset-buying program, much as the Fed has struggled to do over the past year.

Friday’s moves bring Japan further into uncharted territory for advanced economies. Even before the decision, the Bank of Japan’s asset holdings were nearing 60% the size of Japan’s economy, well over twice the relative levels reached by the Fed and the Bank of England.

Japan’s sovereign debt is more than twice the size of the economy, the highest ratio in the world, and the pension fund’s decision to move some of its assets away from Japanese government bonds means the bond market will be more dependent than ever on purchases by the central bank.

That raises many concerns—inside and outside the central bank—about the appearance that the BOJ is in essence underwriting big deficits racked up by politicians. Such a perception could shake market faith in the stability of Japan’s public finances and raise questions about the independence the central bank won from the government only in 1998.

But the move is in line with what Mr. Kuroda and aides to Mr. Abe have described as necessary for Japan. They believe the Bank of Japan can spur inflation and reduce interest rates by taking the leading role as buyer of government bonds from banks and other holders, since the traditional lever, cutting interest rates, has been neutered by current rates near zero.

Indeed, some advocates of the new policy think that a bold bid to spur inflation right away may be the only way to address Japan’s debt problem—as inflation erodes the value of bonds and makes it easier for the government to pay them off—before swelling benefit payments to Japan’s rapidly aging population make that all but impossible.

And Messrs. Kuroda and Abe want Japanese investors to take more risks rather than parking most of their money in government bonds—precisely what the pension fund is now doing.

“A shift from deflation is the most important change in the investment environment,” said Takahiro Mitani, president of the Government Pension Investment Fund. “We built the previous portfolio in an environment where deflation was continuing for some time, but it is getting clear that from now on the environment is turning to moderate inflation from deflation.”

Under the pension fund’s new allocation guidelines, Japanese stocks and foreign stocks will each take up 25% of the fund’s holdings, up from 12% each previously. The fund intends to put 35% of its money in domestic bonds, down from 60%, while the ratio for overseas bonds will rise to 15% from 11%.

Global fund managers have been eagerly awaiting details of the portfolio shift because of the potential for hundreds of billions of dollars to flow into markets inside and outside of the country. Even a one-percentage-point change to its portfolio could mean a shift of more than 1 trillion yen ($9 billion).

“It’s very surprising,” said Robert Waldner, chief fixed income strategist at Invesco Ltd. “Most global pension funds are paring back risk at this point, not adding risk.”

Mr. Mitani said the fund would shift gradually into its new weightings. “We don’t intend to disrupt markets at all,” he said.

For its part, the Bank of Japan will triple the pace of its buying of stock and property funds, extend the average maturity of its bondholdings by three years to 10, and raise the ceiling of its annual Japanese government bond purchases by 30 trillion yen to 80 trillion yen.

Courtsey: WSJ

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