Japan Monetary Policy January 2017


Japan: BoJ forecasts faster growth in January, maintains policy

January 31, 2017

The Bank of Japan (BoJ) maintained its monetary policy at its 30–31 January meeting, voting to continue with its Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control program as long as is necessary to achieve its 2.0% inflation target. The Bank voted 7–2 to leave the existing policy in place and raised its growth forecasts through fiscal 2018 on the back of sustained overseas economic growth and large-scale government stimulus measures, tacitly acknowledging some success with its ongoing and highly-accommodative monetary policy.

For fiscal year 2016, the median of the Policy Board members’ GDP forecasts increased from 1.0% to 1.4%, while forecasts for fiscal years 2017 and 2018 were each revised upwards by 0.2 percentage points, to 1.5% and 1.1% respectively. The BoJ’s revised forecasts highlight a weakening yen, especially against the dollar, and strong global economic growth as causes for optimism in trade and manufacturing. On the domestic front, the corporate and household sectors will benefit from the Bank’s accommodative monetary policy and the government’s bold fiscal spending, mostly due to 2020 Olympic Games-related demand. Uncertainty, however, still looms as it placed the new Trump administration atop its list of foreign risks to the economy, followed by the possibility of a slowdown in China and political developments in Europe.

With the unemployment rate steady near 3.1%, the Bank is hoping that a shortage of labor will translate into higher wages and that this will, in turn, translate into increased consumption and higher prices. Inflation is currently stuck near 0% and, unlike economic growth, the forecasts were not revised upwards for fiscal years 2017 and 2018.

In addition to QQE, with its stated goal of expanding the monetary base until core inflation exceeds the 2.0% price stability target, the BoJ held its overnight interest rate at minus 0.1% for financial institutions and reaffirmed its commitment to the yield curve-targeting program it had introduced last year. At its 20–21 September 2016 monetary policy meeting, the Bank announced that it would purchase Japanese government bonds (JGB) at whatever pace necessary to maintain 10-year JGB yields near 0%. On 3 February 2017, in a move that stunned analysts, the Bank intervened in the market after 10-year yields rose above 0.11%. It was the first time the Bank had turned last year’s yield cap into explicit action, sending a strong message to markets that it is committed to maintaining its yield targets.

The BoJ’s next monetary policy meeting is scheduled for 15–16 March.

The analysts FocusEconomics polled this month expect the BoJ policy rate to end this year at minus 0.12% and see it at minus 0.13% in 2018. The 10-year bond yield is expected to be at minus 0.03% by the end of this year, before rising to 0.07% in 2018. FocusEconomics Consensus Forecast panelists expect the yen to trade at 117.9 per USD at the end of 2017. For 2018, the panel projects the yen to strengthen marginally to 117.6 per USD.

Author:, Economist

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Japan Monetary Policy Chart

Japan Monetary Policy January 2017 0

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

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