Japan Monetary Policy


Japan: Bank of Japan eases further to shore up the economy

December 18, 2015

At its 18–19 December monetary policy meeting, the Bank of Japan (BoJ) voted 6–3 to make a modest tweak to its quantitative and qualitative (QQE) easing program. The BoJ last modified its QQE program in October 2014. The unexpected move included a lengthening of the average remaining maturity of long-term JGB purchases from 7–10 years to 7–12 years and also a new program to purchase JPY 300 billion in exchange-traded funds (ETF). The program will commence in April 2016 and targets stocks that meet certain criteria regarding investment in physical and human capital. Moreover, the BoJ expanded the eligible collateral for financial institutions’ provision of credit by a unanimous vote.

Nevertheless, the Bank decided by an 8–1 vote to continue implementing money market operations so that the monetary base—its main monetary policy instrument—will increase at an annual pace of JPY 80 trillion (approximately USD 658 billion). Once again, board member Takahide Kiuchi cast the lone opposing vote and called for cutting purchases to JPY 45 trillion on fears that the current stimulus could eventually create asset bubbles. The decision is aimed at meeting the Central Bank’s inflation target of 2.0% by the first half of FY 2016.

Despite the introduction of these new measures, the BoJ’s December assessment was little changed from the previous report. The BoJ reiterated that the Japanese economy, along with advanced economies, has continued to recover moderately despite the slowdown in emerging countries, which has affected Japanese exports and production. The Bank added that strong corporate profits have propelled business fixed investment, while steady gains in employment and income have spurred a pickup in private consumption.

Regarding price developments, the Bank stressed that, “inflation expectations appear to be rising on the whole from a somewhat longer-term perspective, although some indicators have recently shown relatively weak developments.” 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.

Although small, the expansion of the QQE program, coupled with the recent rate cuts in China and the Eurozone, highlights the diverging trend in monetary policy between the United States and most of the rest of the world’s economies.

All FocusEconomics Consensus Forecasts panelists expect the collateralized overnight call rate to remain unchanged at between 0.00% and 0.10% until the end of 2017.Panelists expect the yen to trade at 126.6 per USD by the end of 2016. For 2017, the panel projects that the yen will weaken slightly to 126.9 per USD.

Author: Ricard Torné, Lead Economist

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