The Bank of Japan (BoJ) came up with one of the most concentrated monetary stimulus packages in the first week of April, which is capable of injecting $1.4 trillion Yen over the period of two years. Just after the introduction of the stimulus package, it had an instant impact on currency markets as Yen had hit fresh lows against major currencies. Japanese economy, which is going through two decade of stagnant economy and deflationary phase, has been putting huge pressure on the Japanese authority to shift its monetary policy and this stimulus package seems to be the need of the hour.

The falling price in the Japanese economy is hurting the Japanese companies as people don’t have to spend more and the companies are less likely to invest due to weaker returns. In order to break this deflationary economic stance, BoJ’s massive scale stimulus plans to purchase bonds and inject the money into an economy. As per the new stimulus plan, BoJ would purchase long term Japanese bonds every month which would be 70% of the country’s bonds that are sold in the money market in Japan.  BoJ is expecting the citizens and companies to invest in more risky assets like real estate, stock as this stimulus package would trim down the yield in government bonds. In this way, Japanese central bank expects to maintain the inflation rate at 2% in the ensuing coming two years.

However, the decision to come up with such a huge package has different kind of risks where capital flight poses the biggest threat to the economy which is already coping with lethargic growth in recent times. After the BoJ unveiled the monetary stimulus plan, USD rose more than 1% against yen and rose above Y99 for the first time since the month of May, 2009 as the investors are expecting the further decline in Yen’s valuation. So, in the coming days, the currency can slide further on the back of huge capital flights from Japan as the yields on longer time frame Japanese bonds would be falling further. In these circumstances, Japanese domestic investors would be allocating their funds in the overseas market for the higher returns, further pressurizing yen to downfall.