Friday, October 29, 2010

BOJ asset purchase program

BOJ announced this month a large program totaling 5 trillion yen of quantitative easing. What makes this different is that the BOJ will buy corporate bonds rated as low as BBB and well as second tier commercial paper. This place the BOJ more squarely in the credit purchasing arena. They will be making clear choices of which firms will get funding and which will not .They started to buy credit of higher quality last year bu this is a major move down the credit spectrum. This is not what a the lender of last resort should be doing. This is a mix of monetary policy and state intervention.

It is not clear this will work. Picking credits is not easy and not the normal role of central banks. How is this going to stop the deflation in Japan? Also, it is not clear that this size of the program will be effective since the Fed will have its own program of quantitative easing. The impact on the yen may be minimal, yet this is supposed to be one of the key roles of monetary policy.

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