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Japan Monetary Policy October 2020

Japan: Bank of Japan keeps rates unchanged in October, downgrades 2020 outlook

At its meeting ending on 29 October, the Bank of Japan (BoJ) kept its monetary policy unchanged, as widely expected by market analysts. The BoJ likely took the decision so as to continue to take stock of the effects of its previous easing measures on the fragile economy, having gradually but significantly loosened its stance since the beginning of the coronavirus pandemic.

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 decided to continue 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%. Regarding asset purchases, the Bank left its buying commitments unchanged, including those of exchange traded funds, Japanese real estate investment trusts, corporate paper and corporate bonds.

The Bank also released an updated outlook for economic activity and prices, noting that the economy has started to recover following the pernicious effects of the pandemic. However, it commented that “the pace [of recovery] is expected to be only moderate while vigilance against Covid-19 continues”. As such, the Bank revised down its GDP forecast for FY 2020 (April 2020–March 2021) to a contraction of 5.5%—lower than the minus 4.7% estimate in its July report—citing the slow pickup in services demand as the cause of the downgrade. However, it increased its FY 2021 forecast to 3.6% growth from 3.3% in the July report. On the price front, the BoJ sees consumer prices falling 0.6% in FY 2020 (July report: -0.5%) before increasing 0.4% in FY 2021 (July report: +0.3%).

Meanwhile, in its communiqué the BoJ reiterated its dovish tone, stating: “For the time being, the Bank will closely monitor the impact of the novel coronavirus 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.”

Takashi Miwa, chief Japan economist at Nomura, concurs with this, commenting:

“We think that there could therefore be a consensus within the BOJ that the bank should continue to hold back and monitor the effects of its existing monetary policy, while keeping a close eye on how the pandemic plays out and what impact it has on the real economy, prices, and monetary conditions.”

Regarding the outlook, Naohiko Baba, an economist at Goldman Sachs, noted:

“We also think the BOJ will be keen to avoid taking the short-term policy rate deeper into negative territory, as doing so could increase stresses on the financial system. The situation warrants attention, however, as the BOJ might opt for deeper negative rates in the event that USD/JPY were to break below 100, while acknowledging the potential side-effects. In this context, our near-term focus is on what impact the outcome of the November 3 US presidential election could exert on the forex market.”

The next monetary policy meeting is set to end on 18 December.

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