Mount Fuji, Japan

Japan Monetary Policy September 2020

Japan: Bank of Japan holds monetary policy unchanged at September meeting

At its monetary policy meeting ending on 17 September, the Bank of Japan (BoJ) maintained its monetary policy unchanged, a decision widely expected by market analysts, after gradually but significantly loosening its stance since the beginning of the coronavirus pandemic. The BoJ likely made this decision so it could take stock of the effects of its recent easing measures on the fragile Japanese economy.

In terms of rates, the BoJ left the short-term policy rate for current accounts held by financial institutions at the Bank unchanged at minus 0.10%. It also continued to not set an upper limit on the amount of Japanese government bonds (JGBs) it will purchase in order to cap the 10-year JGB yield at around 0.00%. On the asset purchasing side, the Bank left its buying commitments unchanged, including those of exchange traded funds, Japanese real estate investment trusts, corporate paper and corporate bonds. The BoJ also committed to continue supporting the financing of businesses through its extensive and recently expanded programs.

In its communiqué, the Bank noted that the economy has started to pick up following the damaging impact of the coronavirus pandemic, with domestic activity resuming gradually. However, the economy remains in a delicate state, and this, combined with weakening inflation expectations on the back of low oil prices, gave the Bank reason to maintain its policy unchanged this month.

Furthermore, the BoJ reiterated its dovish tone, stating: “For the time being, the Bank will closely monitor the impact of [Covid-19] and will not hesitate to take additional easing measures if necessary, and also it expects short- and long-term policy interest rates to remain at their present or lower levels.”

Expanding on this, Takashi Miwa, chief Japan economist at Nomura, commented:

“The BOJ revised up its assessment of the economy from its July statement. […] At the same time, it clearly lowered its outlook for capex, stating that it is now declining, and again called attention to downside risks. […] We take this to mean that the BOJ is unlikely to make any change to the accommodative measures it has put in place to cope with the COVID-19 pandemic.”

Commenting on any potential policy changes following the election of Yoshihide Suga as the new prime minister, Naohiko Baba, an economist at Goldman Sachs, sees the status quo being maintained:

“Of note, new Prime Minister Suga has emphasized the importance of maintaining a close relationship with the BOJ, as was the case under the Abe administration, and of promoting additional easing measures if deemed necessary to sustain employment and keep companies afloat. In particular, he has identified forex stability as a key area of his crisis management, and as a result, the possibility of the new administration encouraging the BOJ to decide additional easing measures, if the yen were to appreciate sharply, warrants attention to some degree, in our view.”

The next monetary policy meeting is set to end on 29 October.

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