Mount Fuji, Japan

Japan Monetary Policy January 2021

Japan: Bank of Japan leaves policy unchanged at January meeting

At its meeting ending on 21 January, the Bank of Japan (BoJ) kept its monetary policy unchanged, as widely expected by market analysts. The decision came amid an ongoing but fragile recovery, while mounting deflationary pressures in December and heightened daily Covid-19 cases throughout January likely drove the continued wait-and-see approach.

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%. Regarding asset purchases, the Bank kept 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 picked up in recent months, despite remaining in a delicate state given the impact of the pandemic at home and abroad. For FY 2020 (April 2020–March 2021), the Bank downgraded its forecast slightly to a contraction of 5.6% (October report: -5.5%). However, in part due to additional fiscal stimulus announced in early December, the Bank upgraded its GDP forecast for FY 2021 to 3.9% growth from 3.6% in the October report. On the price front, the BoJ sees consumer prices falling 0.5% in FY 2020 (October report: -0.6%) before increasing 0.5% in FY 2021 (October report: +0.4%).

In its communiqué the BoJ reiterated its dovish tone, stating that it will “closely monitor the impact of the novel coronavirus and will not hesitate to take additional easing measures if necessary”. However, the Bank gave no clues as to the contents of the policy assessment announced at its December meeting, which is scheduled for release at the next meeting in March.

Regarding the Bank’s upcoming review, Naohiko Baba, economist at Goldman Sachs, commented:

“We think that the BoJ’s policy review is likely to revolve around (1) enhancing the flexibility of its ETF/J-REIT purchasing program, and (2) expanding funds-supplying measures as a way of supporting the structural reform initiatives already announced by the government (also providing positive interest in return for the usage to mitigate the side effects of its negative interest rate policy). However, we think the BoJ will also intend to include as many other tweaks as possible, taking advantage of this opportunity. In this context, permitting a wider band for 10-year yields and/or modifying the JGB purchasing program will be a possibility.”

Commenting on future policy moves, Alvin Liew, senior economist at United Overseas Bank, noted:

“Looking forward into the next MPM, we maintain our view for the BoJ to do more and enhance its monetary policy easing further, most likely through increasing its JGB purchases and expanding its lending facilities to Japanese corporates and SMEs.”

The next monetary policy meeting is set to end on 19 March.

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