By CentralBankNews.info
Japan’s central bank left its monetary policy stance unchanged, as expected, but lowered its outlook for inflation to be “slightly negative or about 0 percent for the time being” from its previous view that inflation would be about 0 percent due to the decline in energy prices.
The Bank of Japan (BOJ), which surprised financial markets in January by applying a negative interest rate of minus 0.1 percent on banks’ deposits that exceed reserve requirements, confirmed that it would continue with its current policy of boosting the monetary base by about 80 trillion yen annually through the purchase of government bonds.
In addition, the BOJ, which in April 2013 launched a program of aggressive monetary easing in an effort to rid Japan of almost 15 years of deflation and push up inflation to 2 percent, will purchase exchange-traded-funds (ETFs) and real estate trusts so their amounts rise by 3.3 trillion yen and 90 billion yen, annually. It will also purchase commercial paper and corporate bonds so the amounts outstanding rise by about 2.2 trillion and 3.2 trillion yen, respectively.
The BOJ, which in April trimmed its economic outlook, repeated its view that domestic demand is likely to follow an uptrend and exports, which are currently sluggish, should increase moderately as emerging economies move out of their current deceleration phase.
“Thus, Japan’s economy is likely to be on a moderate expanding trend,” said the BOJ.
Earlier this month Japan’s Prime Minister Shinzo Abe said he would delay a planned increase in the consumption tax to 10 percent from 8 percent until October 2019 from April 2017. In 2014, when the sales tax was raised to 8 percent from 5 percent, it pushed the economy into recession.
Although the economy bounced back last year, the slowdown in China and emerging markets has dented Japan’s exports and Gross Domestic Product grew by only 0.1 percent year-on-year in the first quarter of this year compared with 0.7 percent in the final quarter of 2015.
For the current 2016 fiscal year, the BOJ in April forecast average growth of 1.2 percent, 0.1 percent in fiscal 2017 and 1.0 percent for 2018.
The BOJ’s quest for higher inflation has been made more difficult by the fall in crude oil prices and headline inflation fell to minus 0.3 percent in April from minus 0.1 percent in March.
In its latest forecast from April, the BOJ lowered its forecast for consumer price inflation, minus fresh food, in fiscal 2016 to an average 0.5 percent from January’s forecast of 0.8 percent.
For fiscal 2017, the forecast for inflation, excluding the impact of higher taxes, was lowered to 1.7 percent from 1.8 percent. For fiscal 2018 the BOJ forecast inflation of 1.9 percent.
The Bank of Japan issued the following statement:
- (1) Quantity Dimension: The guideline for money market operations
The Bank decided, by an 8-1 majority vote, to set the following guideline for money market operations for the intermeeting period:[Note 1]
The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen. - (2) Quality Dimension: The guidelines for asset purchases
With regard to the asset purchases, the Bank decided, by an 8-1 majority vote, to set the following guidelines:[Note 1]- a) The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen. With a view to encouraging a decline in interest rates across the entire yield curve, the Bank will conduct purchases in a flexible manner in accordance with financial market conditions. The average remaining maturity of the Bank’s JGB purchases will be about 7-12 years.
- b) The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 3.3 trillion yen1 and about 90 billion yen, respectively.
- c) As for CP and corporate bonds, the Bank will maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen, respectively.
1 Of about 3.3 trillion yen, 300 billion yen is used in line with the implementation of a program for purchasing ETFs composed of stocks issued by firms that are proactively investing in physical and human capital, as decided at the MPM held in December 2015.
(3) Interest-Rate Dimension: The policy rate
The Bank decided, by a 7-2 majority vote, to continue applying a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.[Note 2]- Japan’s economy has continued its moderate recovery trend, although exports and production have been sluggish due mainly to the effects of the slowdown in emerging economies. Overseas economies have continued to grow at a moderate pace, but the pace of growth has somewhat decelerated mainly in emerging economies. In this situation, the pick-up in exports has paused. On the domestic demand side, business fixed investment has been on a moderate increasing trend as corporate profits have been at high levels. Against the background of steady improvement in the employment and income situation, private consumption has been resilient, although relatively weak developments have been seen in some indicators. Housing investment has resumed its pick-up, and the pace of decline in public investment has been slowing. Reflecting these developments in demand both at home and abroad and the effects of the Kumamoto Earthquake, industrial production has continued to be more or less flat. Financial conditions are highly accommodative. On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) is about 0 percent. Although inflation expectations appear to be rising on the whole from a somewhat longer-term perspective, they have recently weakened.
- With regard to the outlook, although sluggishness is expected to remain in exports and production for the time being, domestic demand is likely to follow an uptrend, with a virtuous cycle from income to spending being maintained in both the household and corporate sectors, and exports are expected to increase moderately on the back of emerging economies moving out of their deceleration phase. Thus, Japan’s economy is likely to be on a moderate expanding trend. The year-on-year rate of change in the CPI is likely to be slightly negative or about 0 percent for the time being, due to the effects of the decline in energy prices, and, as the underlying trend in inflation steadily rises, accelerate toward 2 percent. [Note 3]
- Risks to the outlook include uncertainties surrounding emerging and commodity-exporting economies, particularly China, developments in the U.S. economy and the influences of its monetary policy response to them on the global financial markets, prospects regarding the European debt problem and the momentum of economic activity and prices in Europe, and geopolitical risks. Against this backdrop, global financial markets have remained volatile. Therefore, due attention still needs to be paid to the risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mindset might be delayed and that the underlying trend in inflation might be negatively affected.5. The Bank will continue with “Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate,” aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will examine risks to economic activity and prices, and take additional easing measures in terms of three dimensions — quantity, quality, and the interest rate — if it is judged necessary for achieving the price stability target.[Note 4]
[Note 1] Voting for the action: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Mr. K. Ishida, Mr. T. Sato, Mr. Y. Harada, Mr. Y. Funo, and Mr. M. Sakurai. Voting against the action: Mr. T. Kiuchi. Mr. T. Kiuchi proposed that the Bank conduct money market operations and asset purchases so that the monetary base and the amount outstanding of its JGB holdings increase at an annual pace of about 45 trillion yen, respectively. The proposal was defeated by a majority vote.
[Note 2] Voting for the action: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Mr. K. Ishida, Mr. Y. Harada, Mr. Y. Funo, and Mr. M. Sakurai. Voting against the action: Mr. T. Sato and Mr. T. Kiuchi. Mr. T. Sato and Mr. T. Kiuchi dissented considering that an interest rate of 0.1 percent should be applied to current account balances excluding the amount outstanding of the required reserves held by financial institutions at the Bank, because negative interest rates would impair the functioning of financial markets and financial intermediation as well as the stability of the JGB market.
[Note 3] Mr. T. Kiuchi proposed, concerning the year-on-year rate of change in the CPI, that it was likely to be slightly negative or about 0 percent for the time being, and would thereafter accelerate very moderately. The proposal was defeated by an 8-1 majority vote. Voting for the proposal: Mr. T. Kiuchi. Voting against the proposal: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Mr. K. Ishida, Mr. T. Sato, Mr. Y. Harada, Mr. Y. Funo, and Mr. M. Sakurai.[Note 4] Mr. T. Kiuchi proposed that the Bank, with the aim to achieve the price stability target of 2 percent in the medium to long term, continue with asset purchases and a virtually zero interest rate policy as long as each of these policy measures was deemed appropriate under flexible policy conduct based on the examination from the two perspectives of the monetary policy framework. The proposal was defeated by an 8-1 majority vote. Voting for the proposal: Mr. T. Kiuchi. Voting against the proposal: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Mr. K. Ishida, Mr. T. Sato, Mr. Y. Harada, Mr. Y. Funo, and Mr. M. Sakurai.”
