The Bank of Japan failed to meet its bond buying target last week for the first time since QQE began in April 2013. The Bank of Japan’s failure in its bond buying reflects Japanese bank’s struggle to fill the widening gap between loans and deposits.
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The Bank of Japan only managed to buy Y2.6tn of treasury bills of a target of Y3tn. This is a result of the large and widening gap between loans and deposits, which Japanese banks have filled by holding government bonds. This reflects the fact the banks have been facing reluctance from potential domestic borrowers, despite the central bank’s attempt to pump liquidity into the market. This serves to highlight one of the many difficulties that the Bank of Japan faces in trying to reflate the economy by asset purchases.
Worries about the effectiveness of QQE and Abenomics in general continue to mount. Prime Minister Shinzo Abe has suggested that he may seek to postpone a planned consumption tax rise from 8% to 10%, which is scheduled for October next year. With the Bank of Japan’s influence waning, policymakers are fearful that the Bank will not be able to deliver on its inflation target of 2% and that a further tax rise could completely derail any hopes for a sustained period of economic growth. Shinzo Abe himself said that the tax rise would be “meaningless” if it inflicted too much damage on the economy.
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