Japan: BoJ takes modest policy action in July
July 29, 2016
The Bank of Japan (BoJ) disappointed the market at its 28–29 July monetary policy meeting as the Board did not meet analysts’ expectations that it would trigger another “bazooka” of monetary easing in an attempt to counter downside risks to the economy and complement the government’s fresh fiscal stimulus. The Bank voted 8–1 to continue implementing money market operations so that the monetary base would increase at an annual pace of JPY 80 trillion (approximately USD 787 billion). The Bank also voted 8–1 to purchase Japanese government bonds so that their outstanding amount would increase at an annual pace of about JPY 80 trillion, with an average remaining maturity of 7–12 years. Finally, the BoJ decided to leave the interest rate for the Policy-Rate Balances in current accounts held by financial institutions at minus 0.1%.
However, the Bank voted 7–2 to increase its annual purchases of exchange-traded funds (ETFs) from JPY 3.3 trillion to JPY 6.0 trillion and expand the size of its lending program in U.S. dollars from USD 12.5 billion to USD 24.0 billion. The BoJ upheld its decisions stating that the slowdown in emerging-market economies and rising uncertainty following the Brexit vote have increased volatility in the global financial markets, which threatens to dampen business sentiment and consumer confidence.
The decisions under the Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate program are aimed at meeting, “the price stability target of 2%, as long as it is necessary for maintaining that target in a stable manner.”
In its July assessment of the economy, the BoJ reaffirmed that Japan’s economy has continued its moderate recovery, though the slowdown in emerging-market economies is weighing on the external sector and industrial output. Going forward, resilient private consumption due to an improved job market and high levels of corporate profits, which translate into stronger investment, will drive economic growth in the archipelago.
Regarding price developments, the Bank stressed that, “although inflation expectations appear to be rising on the whole from a somewhat longer-term perspective, they have recently weakened.” In addition, the Bank stated that the effects of the decline in energy prices will prompt annual variation in consumer prices to be slightly negative or close to 0% for the time being. Against this backdrop, the 2.0% stability target is expected to be achieved during fiscal year 2017, “although this is accompanied by considerable uncertainties.”
The BoJ announced that it will conduct a comprehensive assessment of Japan’s economy and the impact of its policy on it for the next monetary policy meeting that is scheduled for 20–21 September. The review could provide another opportunity for further easing.