Mount Fuji, Japan

Japan Monetary Policy April 2019

Japan: BoJ introduces forward guidance for first time in April and downgrades economic outlook

At its 24–25 April meeting, Bank of Japan (BoJ) board members decided to provide forward guidance on monetary policy for the first time ever. The Bank stated that it will keep the short- and long-term interest rates at the current low levels till at least spring 2020.

Meanwhile, the Bank kept the short-term policy rate applied to current account balances held by financial institutions at the Bank at minus 0.10%. Moreover, 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. The Bank will continue to purchase JGBs at a pace of about JPY 80 trillion (USD 720 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, respectively. Similarly, the Bank’s purchases of commercial paper and corporate bonds were kept unchanged at about JPY 2.2 trillion and JPY 3.2 trillion per year.

In its quarterly outlook report, the BoJ downgraded its GDP growth forecasts for both FY 2019 and FY 2020 by 0.1 percentage points to 0.8% and 0.9%, respectively. The downgrade mostly reflected weaker global demand, which will have a negative impact on business investment and exports. While the inflation forecast for FY 2019, including the effects of a planned sales tax hike in October 2019, was left unchanged at 1.1%, the estimate for FY 2020 was cut to 1.4% (previously reported: 1.5%). Regarding price developments, the Bank stated that inflationary pressures remain subdued due to rising productivity and insufficient wage gains.

Furthermore, the Bank unveiled its inflation forecast for FY 2021, which ends in March 2022. The estimate of 1.6% implies that it will still take some time to achieve the 2.0% inflation target.

Regarding further monetary easing, Takashi Miwa, analyst at Nomura, comments that:

“Any further easing also looks unlikely in the near term. We think the Bank would only be likely to ease further if a resurgence in risk avoidance in global financial markets were to lead to accelerated yen appreciation, but USD/JPY looks stable at the moment. This may be one hidden factor behind the BOJ’s decision to limit its policy changes to minor forward guidance tweaks.”

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

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