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Japan Monetary Policy June 2019

Japan: BoJ keeps monetary policy unchanged amid rising headwinds

At its 19–20 June meeting, board members at the Bank of Japan (BoJ) decided in a seven-to-two vote to keep its monetary policy unchanged, in line with market analysts’ expectations. The BoJ kept 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 657 billion) per year in a flexible manner. Regarding asset purchases other than JGBs, 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.

BoJ members kept the monetary policy framework unchanged despite evidence that Q1’s strong GDP reading was driven by a sharp drop in imports rather than underlying strength in domestic demand. Risks are also quickly skewing to the downside, with China and the United States engaged in a trade war which could add further downward pressure on global growth. Moreover, while the Bank acknowledged that inflation expectations remain subdued, they should increase further down the road on the back of a positive output gap.

At the press conference held after the meeting, Governor Haruhiko Kuroda affirmed that the Bank will “consider additional monetary easing without hesitation if inflation loses its momentum”. In recent days, market participants argued that the BoJ could ease its monetary policy this year in the event of an interest rate cut in the United States. In this regard, Takashi Miwa, Nomura’s chief Japan economist, stated that:

“We think the BOJ would resort to further easing involving ramping up JGB purchases again only if yen appreciation accelerates to a point at which such preemptive communication can no longer be effective and the government also adopts major expansion in fiscal outlays. At this point, such a turn of events looks very unlikely to us.”

The Bank is expected to continue with its stimulus program (officially known as the “quantitative and qualitative monetary easing with yield curve control” framework) at least until spring 2020, in order to achieve the Bank’s inflation target in a stable manner for an extended period of time as price pressures remain subdued.

The Bank’s next monetary policy meeting is scheduled for 29–30 July.

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