Japan Keeps Monetary Policy Steady

In a unanimous vote, the bank’s board stuck to its strategy of expanding the monetary base at an annual pace of 60 trillion yen to 70 trillion yen, or $586 billion to $684 billion, through purchases of government bonds, commercial debt and other assets.

Haruhiko Kuroda, the bank’s new governor, pledged to “respond flexibly” to the recent moves in Japanese government bond yields, as markets “searched for a new equilibrium.” He stressed that there was no cause for immediate concern.

“Yields are up, but at this stage there is no large impact on the real economy,” Mr. Kuroda said at a news conference after the bank’s decision.

He said that the central bank would continue to make large bond purchases to “keep up the downward pressure on interest rates.” He has also suggested that the bank would adjust the way it bought bonds in the market.

At its first policy meeting under Mr. Kuroda last month, the bank unleashed what analysts have called a “shock and awe” monetary policy, a sea change for a bank that had come to be known in recent years for its caution and conservatism.

Declaring he would do “whatever it takes” to combat falling prices, Mr. Kuroda announced that the bank would seek to double Japan’s monetary base, as well as the bank’s holdings of Japanese government bonds, by the end of 2014.

In recent days, worries have grown about rising interest rates in the government bond market, which could threaten Japan’s monetary policy. Japan is vulnerable to rising borrowing costs because of its high public debt, which is twice the size of its economy. Bonds are also the main financial asset held by banks, pension funds and insurance companies, making a surge in debt yields perilous.

The scale of Japan’s quantitative easing is striking. Assuming that the Japanese economy grows by 2 percent a year, the Bank of Japan would expand its assets to just under 60 percent of the country’s gross domestic product, according to estimates from CLSA Asia-Pacific Markets.

The assets of the Federal Reserve, which now total about 20 percent of the American economy, and the European Central Bank’s assets, which come to about 28 percent of the euro zone’s G.D.P., pale in comparison.

Japan stands out in another important way. Under Prime Minister Shinzo Abe, who took office in December and has been the main champion of the bank’s new boldness, Japan is coupling its monetary push with heavy government spending.

Barely two months into office, Mr. Abe pushed through an emergency stimulus package of 10 trillion yen, and the Japanese Parliament is expected to pass an initial budget of 92.6 trillion yen for 2013, with heavy spending on public works.

By contrast, the Fed and the European Central Bank have been forced to depend on monetary policy alone to stave off stagnation and bring about an economic recovery. In both the United States and Europe, a significant increase in government spending remains controversial.

Still, critics have pointed to Japan’s skyrocketing public debt as proof that such spending is not sustainable. The latest spending packages, they say, will be the final push that could send Japan plummeting into a Europe-like debt crisis. Defenders of the bank’s monetary policy had argued that Japan’s bold stimulus efforts would not push interest rates higher, because the central bank promises to buy bonds the government issues.

But in recent days, yields have been volatile, with the key 10-year nominal government bond yield hitting five-year highs last week before later settling down. Traders blamed the central bank’s purchases, saying they created a lack of liquidity in bond markets.

“We think Kuroda has done a great job in boosting asset prices by raising asset price inflation expectation, but he now has to calm down the sentiment in bond market,” Masaaki Kanno, chief economist at JPMorgan Securities Japan, said in a research note. “This is quite challenging.”