Japan: BOJ removes time frame for inflation target; keeps monetary policy unchanged
Bank of Japan (BoJ) board members decided in an 8-to-1 vote to keep the Bank’s monetary policy steady at their 26–27 April meeting, a decision expected by market analysts. The Bank will continue with its stimulus program (officially known as the “Quantitative and Qualitative Monetary Easing with Yield Curve Control” framework) for as long as necessary to achieve the 2.0% inflation target and maintaining it in a stable manner. 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 730 billion) per year. Regarding asset purchases other than JGB, the board unanimously again 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 left unchanged at about JPY 2.2 trillion yen and JPY 3.2 trillion yen per year.
The main news from the April meeting was the Bank’s decision to abandon its pledge of hitting its inflation target at some point in fiscal year 2019, which ends in March 2020. Governor Haruhiko Kuroda downplayed the removal of the time frame in the press conference following the meeting, stating that inflation will likely reach the target in FY 2019 as “market players interpreted the timeframe was a deadline and tied it with monetary policy action”. That said, the BoJ’s decision signals that inflationary pressures are not rising at the expected pace and that its ultra-loose monetary policy will remain in place for an extended period of time. Moreover, Kuroda pledged to further ease monetary policy if inflation remains at low levels.
The BoJ updated its inflation forecasts for the upcoming fiscal years. The median inflation forecast among BoJ members was 1.3% for FY 2018 (January’s report: 1.4%) and 2.3% for FY 2019 (January’s report: 2.3%). Excluding the effects of the scheduled consumption tax hike in October 2019, inflation is seen averaging 1.8% in FY 2019, unchanged from the January report.
On Japan’s future economic performance, the board was more optimistic compared to the January assessment, stating that the economy is expected to grow above potential in FY 2018 on the back of highly accommodative financial conditions, fiscal support and strong global demand. That said, the Bank noted rising protectionist policies, spillovers from Brexit and geopolitical threats as the main risks to Japan’s economic outlook. In this regard, the median GDP growth forecast among BoJ members was 1.6% for FY 2018 (January’s report: +1.4%) and 0.8% for FY 2019 (January’s report: +0.7%). While FY 2018’s strong economic dynamics are expected to carry over into FY 2019, growth will decelerate due to the introduction of the aforementioned sales tax.
With inflation still far from the target and the removal of the time frame, the BoJ will keep its ultra-loose monetary policy in place for the foreseeable future. The Bank’s next monetary policy meeting is scheduled for 14–5 June.