Japan Monetary Policy April 2016


Despite troubling signs, Bank of Japan refrains from expanding its stimulus program in April

The Bank of Japan (BoJ) decided not to expand its stimulus at its 27–28 April monetary policy meeting. This decision took market analysts by surprise as they believed that a strong yen, falling consumer prices and negative effects stemming from the earthquakes that hit the Kumamoto prefecture in April had paved the way for the BoJ to use its bazooka again. The Bank voted 8–1 to continue implementing money market operations so that the monetary base will increase at an annual pace of JPY 80 trillion (approximately USD 740 billion). The Bank also voted 8–1 to purchase Japanese government bonds so that their outstanding amount will increase at an annual pace of about JPY 80 trillion, with an average remaining maturity of 7–12 years. Finally, the BoJ decided to leave the interest rate for the Policy-Rate Balances in current accounts held by financial institutions at minus 0.1%. In order to support the Kumamoto prefecture, the Bank decided by a unanimous vote to lend JPY 300 billion at a zero interest rate to financial institutions in the disaster area.

The decisions under the Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate program are aimed at meeting the, “price stability target of 2% as long as it is necessary for maintaining that target in a stable manner”.

In its April assessment of the economy, the BoJ restated that Japan’s economy has continued its moderate recovery trend. This occurred despite the slowdown in emerging-market economies, which is affecting the external sector and production. Weaknesses in the external sector will continue to dampen growth going forward. That said, the Bank stated that the economy will enter into a virtuous cycle supported by robust dynamics in the household and corporate sectors.

Regarding price developments, the Bank stressed that, “although inflation expectations appear to be rising on the whole from a somewhat longer-term perspective, they have recently weakened.” In addition, the Bank stated that inflation is likely to remain close to 0% for the time being due to the effects of the decline in energy prices. Against this backdrop, the 2% stability target is expected to be achieved during fiscal year 2017. The next monetary policy meeting is scheduled for 16 June.

The analysts FocusEconomics polled this month expect the collateralized overnight call rate to end this year at minus 0.09% and see it at minus 0.11% in 2017.FocusEconomics Consensus Forecast panelists expect the yen to trade at 117.7 per USD at the end of 2016. For 2017, the panel projects the yen to weaken to 119.4 per USD..

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Japan Monetary Policy Chart

Japan Monetary Policy March 2016

Note: Monetary base in JPY trillion and 10-year bond yields %.
Source: Bank of Japan (BoJ) and Thomson Reuters.

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