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Japan Monetary Policy September 2019

Japan: BoJ leaves monetary policy steady in September; signals possible action in October

At its 18–19 September meeting, board members at the Bank of Japan (BoJ) decided in a seven-to-two vote to maintain its current monetary policy stance, 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 adjustable pace of about JPY 80 trillion (USD 740 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.

About the state of the economy, the BoJ stated that growth has continued to expand moderately in recent months, with ongoing trade tensions weakening exports. Regarding prices, inflation is expected to converge towards the 2% target mainly due to a positive output gap.

The BoJ’s decision contrasts with recent moves by the U.S. Federal Reserve and the European Central Bank to ease their monetary policies in recent weeks. However, the Bank appears more open to further easing its ultra-loose monetary policy at its October meeting, in order to revive anemic inflation and support the economy. Particularly, as global demand continues to falter and a scheduled sales tax hike in October could severely hit economic growth. Governor Haruhiko Kuroda’s comments at the post-meeting press conference support this idea: “We are more eager to act given heightening global risks”. At the monetary policy statement, the Bank maintained its dovish bias, stating 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.” Moreover, the Bank left its forward guidance intact, stating that “the Bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, at least through around spring 2020”. The Bank’s next monetary policy meeting is scheduled for 30–31 October.

Assessing BoJ’s options for further action, Takashi Miwa, Nomura’s chief Japan economist, stated that:

“We had previously thought that if the BOJ were to engage in additional easing, it would do so by again increasing purchases of JGBs, in concert with the government’s fiscal expansion policy […] we now see a greater likelihood of this [deeper negative interest rates] as the main policy option if the BOJ does engage in additional easing in future. Even so, we note considerable barriers given the question marks over the effectiveness of such policies to bolster the economy.”

Hiro Shirakawa, Credit Suisse’s vice chairman and Japan chief economist adds that:

“We tend to put a 50% chance on the Bank deciding to ease on 31 October. The main background for this “close call” view is that the Bank might need some more time to get a clearer picture of inflation dynamics, which are likely to be affected by exchange rate movements and real consumption performance after the VAT hike.”

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