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Japan Monetary Policy July 2019

Japan: BoJ keeps monetary policy unchanged in July, vows to expand stimulus if inflation falters

At its 30 July 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 will continue to be capped at around 0%, although the yields will be able to move up and down to some extent. Moreover, the Bank will continue to purchase Japanese government bonds (JGBs) at an unchanged, flexible pace of about JPY 80 trillion (USD 657 billion) per year. Regarding asset purchases other than JGBs, the board unanimously decided to continue purchasing 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 elected to keep the monetary policy framework unchanged despite heightened downside risks to the growth and inflation outlook, especially related to lower global growth, the U.S.-China trade war and Japan’s feud with South Korea. While they acknowledged these risks, they reaffirmed their belief that both domestic demand and inflation should gradually trend higher, especially thanks to a positive output gap.

Nevertheless, the monetary policy statement added that “the Bank will not hesitate to take additional easing measures if there is a greater possibility that the momentum toward achieving the price stability target will be lost.” This signal that the BoJ was willing to move pre-emptively against potential inflation weakness was reinforced by Governor Haruhiko Kuroda’s comments at the post-meeting press conference, emphasizing the Bank’s stronger commitment. In any case, a policy move would likely depend on the evolution of foreign exchange markets, with the yen potentially under upward pressure due to the interest rate cut announced by the U.S. Federal Reserve on 31 July, and likely dovish shifts from other large central banks.

Takashi Miwa, Nomura’s chief Japan economist, stated that:

“The BOJ has publicly stated that it would pursue additional easing measures if needed, but we think its only practicable option for further easing is that of accelerating its expansion of the monetary base, accomplished by means of stepped-up purchases of JGBs made in coordination with increased fiscal outlays and increased issuance of JGBs to fund those outlays. We would expect the BOJ to pursue additional easing only if yen appreciation were to take USD/JPY to around 100 […]. In any other circumstances, we expect the BOJ to simply carry on with its current monetary policies.”

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. The Bank’s next monetary policy meeting is scheduled for 18–19 September.

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