Japan Becomes Third Major Economy To Adopt Aggressive Stimulus As Markets Begin To Wonder If Easings Are Becoming Competitive

The European Central Bank (ECB) earlier this month declared it would make open-ended purchases of short-term bonds to shore up the balance sheets of distressed Eurozone member countries. That was followed, after lengthy and strained discussions, by approval to create the permanent bailout structure called the European Stability Mechanism (ESM).
Then last week, the US Federal Reserve instituted a third quantitative easing (QE3) and announced it would make open-ended bond purchases until long after the unemployment rate improved to acceptable levels.
Markets have now become concerned that the world’s largest economies are competing to see how much money each can pump into their respective economies despite side effects that may not be healthy.
Japan’s yen consistently trades at a high level—a bane of Japanese policy makers—primarily because the US Fed has kept interest rates so low.
The mechanism used by all three countries is a focus on buying government bonds, among other securities. The purpose is to ease access to needed funds by businesses and households. Buying bonds keeps interest rates low and reduces risk premiums.
Easing action by the Bank of Japan (BoJ), its central bank, was widely expected but not to the amount and extent announced by the bank.
The markets responded favorably and sent the dollar soaring through the 79 yen level and boosting the Nikkei index by 1.2%.
The BoJ did not change its overnight call loan rate, which stands at .0% to .1%. The BoJ committed to buying another 5 trillion yen in bonds by the end of 2013 and an additional 5 trillion yen in short-term bonds by the end of June 2013.
The key will be to see which countries can deftly navigate the balance of aggressive stimulus with rising inflation concerns and keep economies from giving the world a hyper-inflation situation.

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