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Japan Monetary Policy January 2018

Japan: Bank of Japan maintains monetary policy stance in January

The Bank of Japan’s (BoJ) board members decided in an 8-to-1 vote to keep monetary policy unchanged. The decision, made at the 22–23 January meeting, was in line with market analysts’ expectations. The Bank decided to continue with its stimulus program (officially known as the “Quantitative and Qualitative Monetary Easing with Yield Curve Control” framework) for as long as necessary to achieve the 2.0% inflation target. The short-term policy rate applied to current account balances held by financial institutions at the Bank was left at minus 0.1%, 10-year bond yields were capped at around 0%, and the pace of Japanese government bond purchases remained at JPY 80 trillion (USD 724 billion) annually.

The Bank was slightly more upbeat regarding the trajectory of inflation than at its December meeting, when it said inflation remained in a “weakening phase”; it now sees inflation expectations “moving sideways”. The BoJ furthermore maintained its expectation that inflation will gradually increase towards its objective of 2% over the medium-to-long term, supported by a solid economic expansion which is buttressing both corporate and household spending and should gradually close the output gap.

The forecasts released by the Bank were marginally more optimistic than in the October report for the 2018 fiscal year: GDP growth is forecasted between 1.3% and 1.5%, up from 1.2% to 1.4%, while the range for inflation is now 1.3% to 1.6%, up from 1.1% to 1.6% previously. The forecasts for fiscal year 2019 were largely unchanged, with a GDP estimate of between 0.7% and 0.9% (previously: between +0.7% and +0.8%), and inflation stable at between 2.0% and 2.5%. These estimates included the effect of the consumption tax hike to 10% scheduled to be introduced in October 2019, which should bolster inflation but weigh on GDP growth somewhat.

Meanwhile, the share of households expecting inflation to accelerate reached a two-year high in January; however the BoJ has been very careful not to appear too optimistic about the outlook, for fear the market would interpret it as a declaration of intention to exit massive monetary stimulus. Reinforcing the point, Governor Haruhiko Kuroda commented, “There is still some distance to 2 percent inflation, so we’re in no condition yet to debate the timing of an exit from ultra-easy monetary policy.”

With other major central banks now starting to exit their post-crisis policies, it remains crucial for the BoJ to steer market expectations to prevent developments that could hamper inflation dynamics, such as an unwelcome rise in the value of the yen. With inflation well below the target, Governor Haruhiko Kuroda will keep the BoJ’s monetary policy program in place for the foreseeable future. The Bank’s next monetary policy meeting is scheduled for 8–9 March.

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