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Japan Monetary Policy October 2019

Japan: BoJ leaves monetary policy unchanged in October but tweaks forward guidance

At its 30–31 October meeting, board members at the Bank of Japan (BoJ) decided in a seven-to-two vote to keep its current monetary policy scheme. Although the result was widely anticipated by market participants, an increasing number of analysts expect the Central Bank to ease monetary policy further ahead. The BoJ kept the short-term policy rate, which applies 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 736 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.

The BoJ, however, tweaked its forward guidance to underline that the Bank is willing to take action if risks to meet the inflation target increase. In this regard, the forward guidance now states that “the Bank expects short- and long-term interest rates to remain at their present or lower levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost.”

Despite the change in the forward guidance, a majority of analysts do not think the BoJ will cut rates anytime soon as summarized by Hiromichi Shirakawa, chief Japan economist at Credit Suisse:

“The BoJ didn’t move at today’s regular board meeting and appeared to remain reluctant to take any hard actions. It only tweaked the forward guidance and the new guidance doesn’t look to suggest any imminent rate cuts. We think it necessary to revisit our view on the BoJ policy. For the time being, it seems appropriate to predict the Bank to take easing actions only when a significant negative demand shock or a major downshift in the CPI inflation rate takes place.”

Regarding the state of the economy, the BoJ noted that the Japanese economy should fare relatively well despite the global slowdown and weaker domestic demand following the October consumption tax hike. Accommodative monetary conditions and stronger fiscal support will support growth. Moreover, a positive output gap is expected to support price pressures, allowing inflation to increase gradually towards the 2% target.

In its quarterly outlook report, the BoJ downgraded its GDP growth forecasts for FY 2020 by 0.2 percentage points to a median of 0.7%. GDP growth for FY 2021 was lowered by 0.1 percentage points to 0.9%. The downgrade mostly reflected weaker global demand. Regarding prices, the Bank now sees inflation at 1.1% in FY 2020 (previously: 1.3%) and 1.5% in FY 2021 (previously: 1.6%), mostly on the back of lower oil prices.

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