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Japan Monetary Policy June 2018

Japan: BoJ maintains ultra-loose monetary policy amid low inflation

Bank of Japan (BoJ) board members decided in an 8-to-1 vote to hold the Bank’s monetary policy firm at their 14–15 June meeting, a decision in line with market expectations, as inflation remains stagnant. The Bank will continue its stimulus program (officially known as the “Quantitative and Qualitative Monetary Easing with Yield Curve Control” framework) until inflation rises and stabilizes above the 2.0% target. The short-term policy rate applied to current account balances held by financial institutions at the Bank was left at minus 0.1%, 10-year Japanese government bond (JGB) yields were capped at around 0%, and the pace of JGB purchases remained at JPY 80 trillion (USD 723 billion) per year. Regarding asset purchases other than JGB, the board unanimously decided to purchase 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 Bank was more downbeat about the trajectory of inflation at its June meeting, noting inflation is projected to be in the 0.5%–1.0% range, which is lower than the 1.0% projection given in the April meeting. The Bank maintained its view that inflation should pick up on the back of an improvement in the output gap, strong domestic demand, and rising wages. However, one board member, Goushi Kataoka, voiced dissent over inflation expectations, stating “the possibility of the year-on-year rate of change in the CPI increasing toward 2 percent going forward was low at this point.” Mr. Kataoka was the lone nay vote and advocated for looser monetary policy.

With inflation still far from the target and with no time frame of when it will reach the target, the BoJ is set to keep its ultra-loose monetary policy in place for the foreseeable future. In a press conference following the meeting, Governor Haruhiko Kuroda stated, “It’s too early to talk about a specific method or process of normalization at the moment, as the 2 percent target remains far off.” The BoJ will walk a fine line moving forward between pursuing price stability and keeping monetary policy too accommodative compared to its counterparts in the U.S., Europe, and other Asian countries that have begun to taper off quantitative easing programs and raise interest rates. The Bank’s next monetary policy meeting is scheduled for 30–31 July.

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