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Japan Monetary Policy January 2019

Japan: BoJ keeps monetary policy steady, downgrades inflation forecasts

At its 22–23 January meeting, Bank of Japan (BoJ) board members decided in a seven-to-two vote to keep its monetary policy unchanged, as was 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 730 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 in the coming years on the back of loose monetary conditions and robust government spending. That said, the Bank noted that the consumption tax hike scheduled for October 2019 will hurt economic activity and that the trade spat between China and the United States remains a key downside risk. Against this backdrop, the median GDP growth forecast from the policy board members was revised slightly up for both FY 2019 (January 2019: +0.9%; October 2018: +0.8%) and FY 2020 (January 2019: +1.0%; October 2018: +0.8%).

Regarding price developments, the Bank stated that inflation has been relatively weak, mostly reflecting the traditional deflationary mindset among Japanese people following years of subdued growth and deflation. Although the Bank promised that inflation will continue climbing towards the 2.0% target, it downgraded the inflation forecasts for the second consecutive time due to the decline in crude oil prices. Taking into account the effects of the consumption tax increase, the Policy Board members’ median forecasts were lowered to 1.1% for FY 2019 (October: 1.6%) and 1.5% for FY 2020 (October: 1.6%) respectively.

Given Japan’s subdued inflation outlook, the Bank will likely 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. Paradoxically, only fears over the impact of ultra-loose monetary policies on the financial sector would lead to the improbable situation of the BoJ unwinding its QE program in the short-term.

The Bank’s next monetary policy meeting is scheduled for 14–15 March.

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