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Bank of Japan keeps its monetary policy on hold in October

The Bank of Japan (BoJ) kept its monetary policy program unchanged at its 30–31 October meeting, meeting what market analysts had expected. The Bank decided to 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. 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 bond yields were capped at around 0%, and the pace of Japanese government bond purchases remained at JPY 80 trillion (USD 705 billion) annually. The Bank’s board members voted 8 to 1 in favor of continuity. Goushi Kataoka, again the only dissenter, restated that the BoJ should adopt additional easing measures to achieve its inflation target, and that the Bank should buy government bonds so that the 15-year yield would remain under 0.2%.

Despite accelerating slightly in recent months, inflation remains relatively weak on the back of temporary factors and the traditional Japanese “deflationary mindset”. Although the job market is tightening, companies continued to limit wage increases, failing to add upward pressure on prices. Going forward, the BoJ argued that inflation could pick up as a result of an improving output gap and higher commodity prices. That said, the expected increase in inflation could be jeopardized by persistent weak wage growth and a strengthening yen. The economy nevertheless continues to expand moderately due to a combination of healthy external demand, higher business sentiment and a tighter labor market.

Against this backdrop, the BoJ trimmed its inflation forecast slightly, maintaining its view that inflation will hit the 2.0% target by March 2020. The Bank predicts that inflation in the year to March 2018 will be 0.8% (previously: 1.1%). For the following fiscal year, the Bank lowered its projection from 1.5% to 1.4%. For the fiscal year ending in 2020, the Bank left its forecast unchanged at 2.3% (1.8% excluding the effects of the consumption tax hike). GDP growth forecasts were upgraded from 1.8% to 1.9% for fiscal year 2017. For fiscal years 2018 and 2019, projections were left unchanged at 1.4% and 0.7%, respectively.

The Bank of Japan will continue to pursue an ultra-loose monetary policy going forward, increasingly out of sync with its international peers. Structural factors are limiting any sustainable upswing in prices, and the BoJ’s massive stimulus has not helped revive inflation significantly. As a result, analysts are wondering whether the BoJ is running out of ammunition to accomplish its mandate. The Bank’s next monetary policy meeting, which is scheduled for 20–21 December, could shed light on the BoJ’s next steps.

The analysts FocusEconomics polled this month expect the Bank of Japan’s short-term policy rate to end both 2018 and 2019 at between minus 0.05% and minus 0.10%. The 10-year bond yield is expected to be 0.07% at the end of 2018, before rising to 0.20% in 2019.
Panelists expect the yen to trade at 111.7 per USD at the end of 2018. For 2019, the panel also projects that the yen will end the year trading at 111.7 per USD.

Japan - Money Data

2012  2013  2014  2015  2016  
Money (annual variation in %)2.6  4.2  3.6  3.1  3.9  

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Japan Money Chart


Japan Money
Note: Annual variation of M2 in %.
Source: Bank of Japan and FocusEconomics calculations.

Japan Facts

ValueChangeDate
Bond Yield0.04-4.41 %Nov 17
Exchange Rate112.1-0.35 %Nov 17
Stock Market22,3970.40 %Nov 17

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