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Japan Monetary Policy September 2018

Japan: BoJ keeps monetary policy steady

At its 18–19 September meeting, Bank of Japan (BoJ) board members voted seven-to-two to maintain its monetary policy steady, 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 0.1%. Reflecting the newly-introduced forward guidance, 10-year Japanese government bond (JGB) yields were capped at around 0%, albeit with some elasticity which will allow the yields to move upward and downward to some extent. Moreover, the Bank will continue to purchase JGBs at a pace of about JPY 80 trillion (USD 712 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 continues to expand “moderately”, propelled by positive business confidence, highly accommodative financial conditions and an improving job market. Despite the rosy growth outlook, the BoJ warned that inflationary pressures remain subdued with core inflation well below the Bank’s target of 2%. However, the BoJ foresees that inflation will gradually move towards the target thanks to rising inflation expectations in the mid- to long-term and the economy expanding above potential.

The main downside risks to the Bank’s economic outlook are the consequences of a planned consumption tax hike in October 2019, a disorderly Brexit, rising trade protectionism and other geopolitical risks.

Against this backdrop, the Bank stated 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. Regarding future steps, the board members noted that they will keep the ultra-loose stance for an extended period of time, confirming that the Bank’s policy continues to diverge from that of the Fed and the ECB.

The Bank’s next monetary policy meeting is scheduled for 30–31 October.

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