Iwata answered why it is so important to reach this 2% inflation goal:
… deflation must be avoided once and for all. It squeezes corporate profits through price declines of goods and
services … Put differently, the real value of debts will increase as deflation continues. In light of an increasing real
value of debts, firms become cautious in terms of their attitude toward business investment that requires fund-
raising. As a result, production and labor demands of the economy as a whole will decline, leading to a rise in the
unemployment rate and a decline in wages; hence, people’s living standards will go down as well. On top of this, an
inflation rate of about 1 percent is not necessarily enough as a buffer against the slightest risk of deflation.3
Iwata then went on to describe the two pillars of the QQE program:
1) A commitment to achieving the 2% inflation target at the earliest possible time, with a time horizon of
about two years
2) A demonstration of concrete actions toward that commitment
As far as concrete actions:
• The BOJ aims to take the monetary base from 138 trillion yen at end of 2012 to 270 trillion yen by year-end
2014—in effect nearly doubling it.
• The composition of the balance sheet is also changing to favor riskier assets.
o Regarding the purchase of Japanese government bonds (JGBs): the BOJ “now purchases JGBs in all
maturities including those with super-long maturities of 40 years. As a result of this, the average
remaining maturity of the Bank’s JGB purchases has been more than doubled, extending from slightly
less than three years to about seven years.”4
One of the most interesting elements to me is Iwata’s description of the risky asset purchases:
On top of this, the Bank has increased the purchases of exchange-traded funds (ETFs) and Japan real estate
investment trusts (J-REITs) in order to suppress risk premiums associated with those types of assets.5