Japan given benefit of doubt on ambitious 2% inflation target

Might just be doable, says BBVA.

BBVA noted that Bank of Japan’s newly appointed Governor Haruhiko Kuroda has announced plans to double the monetary base over the next two years by doubling the Bank’s monthly asset purchases, which will now include longer maturity bonds and an increase in the purchase of risky assets.

The new policy aims to achieve the 2% inflation target over the coming two years, and passes the ball back to the government to implement the two other elements of Prime Minister Abe’s 3-pronged strategy to reinvigorate growth, namely fiscal stimulus and structural reforms.

This shift in its monetary policy paradigm exceeded market expectations and will involve a huge expansion of its balance sheet, a notably sharp departure from the caution practiced by Kuroda's predecessor, said BBVA.

"While financial markets have cheered the BOJ’s move, some observers have voiced scepticism, ranging from whether the inflation target can be achieved, to worries over the risks of destabilizing currency and bond markets and the implications of an eventual unwinding of the massive monetary stimulus (a la concerns voiced with QE by the Fed)," said BBVA.

"For now, we are inclined to give the BOJ the benefit of the doubt, and we will also watch for the impact on regional economies given the new tail winds generated by the BOJ policy to cross-border capital flows," it added.