Mount Fuji, Japan

Japan Monetary Policy July 2018

Japan: BoJ remains committed to ultra-loose monetary policy, introduces forward guidance to alleviate negative effects

At its 30–31 July meeting, Bank of Japan (BoJ) board members voted seven-to-two to keep monetary policy unchanged, as expected by market analysts. In addition, the Bank decided to introduce forward guidance to its framework to allow for greater flexibility in its monetary policy and to abate some of the negative consequences of maintaining a prolonged accommodative stance. The BoJ maintained the short-term policy rate applied to current account balances held by financial institutions at the Bank at minus 0.1%. Moreover, 10-year Japanese government bond (JGB) yields were capped at around 0%, and the pace of JGB purchases remained at about 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 noted it will likely take more time than expected to achieve price stability around the 2% inflation target. Moreover, it maintained its previous projection of inflation coming in the 0.5%–1.0% range this year. Following the meeting, the BoJ released the latest edition of the Outlook for Economic Activity and Prices publication, in which the Bank sees the economy continuing to grow above potential in FY 2018. Economic growth is expected to be buttressed by accommodative financial conditions, strong domestic demand and a healthy labor market. Nevertheless, the Bank revised down its economic forecast for FY 2018 to 1.3%–1.5% growth (April report: +1.4%–1.7% year-on-year). Despite solid economic growth, inflation remains sluggish and has yet to rally with the strength of the economy and the labor market tightening. It is the Bank’s view that a deeply entrenched mindset caused by a prolonged period of low growth and deflation is holding firms back from raising wages and prices, as well as keeping consumers intolerant to price increases. Consequently, the Bank downgraded its inflation forecast for FY 2018 to 1.0%–1.2% (April report: 1.2%–1.3%).

In the accompanying press release the Bank announced its decision to introduce forward guidance for policy rates to its stimulus program (officially known as the “Quantitative and Qualitative Monetary Easing with Yield Curve Control” framework) in order to “strengthen its commitment to achieving the price stability target” while increasing its flexibility when conducting asset purchases and market operations. According to Nomura analysts, this move aims at “striking a balance between maintaining its accommodative monetary easing and mitigating the side effects of this easing”. In particular, the Bank added an—as yet unspecified—element of flexibility to the movement of the ten-year yield, stating it could “move upward and downward to some extent”. One key takeaway from the meeting is the Bank’s stated intention to maintain the current low levels of short- and long-term interest rates for “an extended period of time”, likely until after the implementation of the consumption tax hike in October 2019.

The Bank’s next monetary policy meeting is scheduled for 18–19 September.

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