Japan Monetary Policy July 2017


Japan: BoJ keeps policy steady, trims inflation forecasts

July 20, 2017

The Bank of Japan (BoJ) left its monetary policy stance at its 19–20 July meeting, voting to continue with its program of Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control as long as is necessary to achieve and maintain its 2.0% inflation target. The Bank voted 7–2 to maintain the existing policy in place, which was in line with market expectations. This was the last meeting for the two dissenters, who are in favor of a gradual normalization. Their successors are less likely to oppose Governor Haruhiko Kuroda, leaving a monochrome board. The interest rate applied to policy rate balances in current accounts held by financial institutions at the Bank was left at minus 0.1%, 10-year bond yields were capped at around 0%, while the pace of asset purchases remained at JPY 80 trillion (USD 714 billion) annually.

While the BoJ left its monetary policy steady, it pushed back the timing of achieving its inflation target to the fiscal year ending in March 2020. This represents the sixth time that the Bank postponed the price target timeframe and signals that the ultra-loose monetary policy will remain intact for the foreseeable future. Inflation remains weak as firms are being too “cautious” in hiking salaries. In this regard, the Bank cut its inflation projections for FY 2017 to between 0.5% and 1.3% (previously: 0.6%–1.6%) and for FY 2018 to between 0.8% and 1.6% (previously: 0.9%–1.9%).

The fact that the Japanese economy is in good shape due to healthy global demand, largely accommodative financial conditions, fiscal support and a declining unemployment rate led the Bank to upgrade their GDP projections. The BoJ now sees the economy expanding between 1.5% and 1.8% in FY 2017 (previously: between +1.4% and 1.6%), while growth will decelerate slightly to between 1.1% and 1.5% in FY 2018 (previously: between +1.1% and 1.3%). The next meeting is scheduled for 20–21 September.

The analysts FocusEconomics polled this month expect the BoJ’s short-term policy rate to end this year at minus 0.10%, and see it ending 2018 at minus 0.09%. The 10-year bond yield is expected to be 0.05% at the end of this year, before rising slightly to 0.07% in 2018.FocusEconomics Consensus Forecast panelists expect the yen to trade at 114.4 per USD at the end of 2017. For 2018, the panel projects that the yen will trade at 113.5 per USD.

Author: Ricard Torné, Lead Economist

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