Mount Fuji, Japan

Japan Monetary Policy October 2018

Japan: BoJ holds monetary policy; cuts inflation forecasts

At its 30–31 October meeting, Bank of Japan (BoJ) board members voted seven-to-two to keep its monetary policy unchanged, as expected by market analysts. The BoJ maintained the short-term policy rate applied to current account balances held by financial institutions at the Bank at minus 0.10%. 10-year Japanese government bond (JGB) yields were capped at around 0%, albeit with some elasticity which will allow the yields to move upwards and downwards to some extent. Moreover, the Bank will continue to purchase JGBs at a pace of about JPY 80 trillion (USD 704 billion) per year in a flexible manner. Regarding asset purchases other than JGB, the board unanimously decided to purchase exchange-traded funds (ETFs) and Japanese real estate investment trusts (J-REITS) at an annual pace of about JPY 6 trillion and JPY 90 billion yen, respectively. Similarly, the Bank’s purchases of commercial paper and corporate bonds were kept unchanged at about JPY 2.2 trillion yen and JPY 3.2 trillion yen per year.

The Bank noted the economy will continue to expand above potential in fiscal year 2018, which ends in March 2019. Looking forward, however, growth will be hit by weaker business fixed investment due to cyclical adjustments and the impact of a planned sales tax hike in October 2019. Against this backdrop, the median GDP growth forecast from the policy board members was kept unchanged at 0.8% for both FY 2019 and FY 2020.

Regarding price developments, the Bank stated that inflation has been relatively weak despite above potential economic growth and the tightening labor market. Limited wage growth and subdued productivity gains are the main factors behind the sluggishness in price increases. Therefore, inflation expectations for the mid- and long-term have diminished compared to previous estimates. Taking into account the effects of the consumption tax increase, the Bank lowered its inflation forecasts to 1.9% for FY 2019 (July forecast: 2.0%) and 2.0% for FY 2020 (July forecast: 2.1%).

The Bank noted that it will continue with its stimulus program (officially known as the “quantitative and qualitative monetary easing with yield curve control” framework) in order to achieve the Bank’s inflation target in a stable manner for an extended period of time. That said, Governor Haruhiko Kuroda stated on 5 November that the country was “no longer in a situation where decisively implementing a large-scale policy to overcome deflation was judged as the most appropriate policy to conduct”. With this comment, Kuroda signaled that additional monetary stimulus is no longer in the pipeline and that the next move, whenever it happens, will likely be on the tightening side.

The Bank’s next monetary policy meeting is scheduled for 19–20 December.

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