Japanese Quantitative Easing Gets a Technical Tweak

July 12, 2012

After six and a quarter hours of deliberations over Wednesday and Thursday, the Bank of Japan Policy Board decided by votes of seven to zero to leave the 0-0.1% target range for overnight uncollateralized money unchanged and to retain a JPY 70 trillion (almost $883 billion) overall size limit to quantitative easing.  These results were anticipated, but officials delivered a small surprise by changing the composition of its quantitative easing in response to recent under-subscription of credit lending operations.  These were cut by JPY 5 trillion to JPY 25 trillion, whereas purchases of short-term discount bills within the asset purchase fund have been increased by JPY 5 trillion to JPY 45 trillion.  Previously in February and April of this year, the overall size of the central bank’s quantitative easing had been raised by JPY 10 trillion and JPY 5 trillion, respectively, from an end-2011 level of JPY 55 trillion.  The fine-tuned changes in the terms of quantitative easing are spelled out in a published amendment.

Today’s action did not change the overall thrust of monetary policy, as central banks in China and South Korea have done this past week.  Market reaction to the Bank of Japan’s decision was initially one of disappointment.

In the main statement explaining today’s decision, monetary policymakers didn’t change their macroeconomic outlook in a meaningful way.  An economic recovery is being spearheaded by consumption and reconstruction investment, which are expected to continue firm and be supplemented by better external demand after a while.  On-year core CPI inflation is likely to hover near zero “for the time being,” but Governor Shirakawa projected such may firm to 1% in 2014.  Once inflation has returned to 1% and officials are convinced that such a level will be sustained, a tighter stance will start to be considered.

The Bank of Japan updates its growth and price forecasts each July, as well as in October, January and April.  The table below gives the evolution of these projections.

  10/10 01/11 04/11 07/11 10/11 01/12 04/12 07/12
GDP                
FY11 +1.8% +1.6% +0.6% +0.4% +0.3% -0.4% -0.2%  
FY12 +2.1% +2.0% +2.9% +2.9% +2.2% +2.0% +2.3% +2.2%
FY13         +1.5% +1.6% +1.7% +1.7%
Core CPI                
FY11 +0.1% +0.3% +0.7% +0.7% 0.0% -0.1% 0.0%  
FY12 +0.6% +0.6% +0.7% +0.7% 0.1% 0.1% +0.3% +0.2%
FY13         +0.5% 0.5% +0.7% +0.7%

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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