Japan Monetary Policy


Japan: Bank of Japan unexpectedly steps up asset purchases to reinvigorate the economy

October 31, 2014

At its 31 October monetary policy meeting, the Bank of Japan (BoJ) announced that it will accelerate the pace of asset purchases in a split 5–4 vote. The Bank decided to implement money market operations so that the monetary base—its main policy instrument—will increase at an annual pace of JPY 80 trillion (approximately USD 712 billion), which is up from the previous JPY 60-70 trillion. In addition, the Bank’s Policy Board will increase the pace of its annual purchases of Japan Government Bonds (JGB) from JPY 50 trillion to about JPY 80 trillion, while it will bring the average maturity of JGB purchases up to 7–10 years, which represents an extension of three years compared with the past. The Bank also stated that it will increase its investment in exchange-traded funds and Japan real estate investment trusts.

The decision is aimed at meeting the Central Bank’s inflation target of 2.0% and pre-empting risks of a return to Japan’s traditional “deflationary mindset”. The BoJ’s seeks to tackle downside risks for the country’s inflation outlook, which are affected by, “weak developments in demand following the consumption tax hike and a substantial decline in crude oil prices.” Against this backdrop, the Bank lowered its inflation forecasts for fiscal years 2014, 2015 and 2016.

Regarding Japan’s economic conditions, the BoJ stated that the economy is continuing to recover moderately as a trend and that GDP, “is expected to continue growing at a pace above its potential.” The next monetary policy meeting is scheduled for 18 November.

The monetary base expanded 35.3% in September to JPY 246 trillion, which was slightly up from the JPY 242 trillion tallied in August and marked an all-time high. With this data, the Central Bank is on track to meet its target of doubling the country’s monetary base in 2015 as the monetary base has expanded by an accumulated 64.3% since the Bank unveiled its quantitative and qualitative easing program in April 2013.

All of the FocusEconomics Consensus Forecasts panelists expect the collateralized overnight call rate to remain unchanged at between 0.0% and 0.1% in 2014, 2015 and 2016. FocusEconomics Consensus Forecast panelists expect the yen to trade at 107.6 per USD by the end of this year. For 2015, the panel projects that the yen will weaken further to 112.7 per USD.

Author: Ricard Torné, Lead Economist

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Japan Monetary Policy Chart

Japan Monetary Policy October 2014

Note: Monetary base in JPY trillion and 10-year bond yields %.
Source: Bank of Japan (BoJ) and Thomson Reuters.

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