Japan Monetary Policy February 2017

Japan

Japan: BoJ keeps policy unchanged despite Fed rate hike

March 16, 2017

The Bank of Japan (BoJ) maintained its monetary policy stance at its 15–16 March meeting, voting to continue with its Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control program as long as is necessary to achieve and maintain its 2.0% inflation target. The Bank voted 7–2 to leave the existing policy in place despite the recent rate hike by the United States Federal Reserve. While the BoJ’s decision was in line with market expectations, it also highlighted the diverging monetary policy trends among major central banks.

Although inflation is gradually resurfacing in the country on the back of higher energy prices, the Bank stated that, “inflation expectations have remained in a weakening phase.” Moreover, although the economy expanded for the fourth consecutive quarter in Q4, growth remains relatively meager and is mostly supported by a pick-up in global trade and a weak yen. Private consumption, the cornerstone of Prime Minister Shinzo Abe’s strategy to boost economic growth, remains sluggish as wage growth has stayed lackluster despite a tighter labor market.

Analysts do not believe that the BoJ will change its monetary stance anytime soon as risks are looming on the horizon. Uncertainty about Donald Trump’s trade policy is casting a long shadow on Japan’s all-important external sector, while the possibility of a faster tightening by the Federal Reserve has the potential to heighten volatility in the financial and foreign exchange markets. An abrupt slowdown in China and the consequences of Brexit are also key concerns. The BoJ’s next monetary policy meeting is scheduled for 26–27 April.

The analysts FocusEconomics polled this month expect the BoJ short-term policy rate to end this year at minus 0.11%, and also see it ending 2018 at minus 0.11%. The 10-year bond yield is expected to be 0.06% by the end of this year, before rising to 0.10% in 2018. FocusEconomics Consensus Forecast panelists expect the yen to trade at 117.9 per USD at the end of 2017. For 2018, the panel projects the yen to strengthen marginally to 116.9 per USD.


Author:, Economist

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Japan Monetary Policy February 2017 0

Note: Monetary base in JPY trillion and 10-year bond yields %.
Source: Bank of Japan (BoJ) and Thomson Reuters.


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