Bank of Japan Board Leaves Policy Unchanged, Releases Semi-Annual Outlook

April 30, 2014

The interest rate and asset purchase policy settings will continue to be those that were introduced thirteen months ago.  Japan’s central bank is pursuing a virtual zero interest rate policy within a range of 0.0-0.1% on its overnight interest rate.  The monetary base is being increased at an annual pace of about 60-70 trillion yen through asset purchases dominated by 50 trillion JGBs a year but also including ETFs and J-REITS.  The qualitative element of the BOJ’s policy calls for a sharp rise in the average maturity duration of its JGB holdings to seven years. The vote was unanimous, as has been typical.  The meeting lasted only three hours and 46 minutes and ended with the release of the Outlook for Economic Activity and Prices as well the reaffirmed policy.

The Outlook laid out a familiar economic scenario of moderate recovery, resuming after a long-anticipated second-quarter 2014 lull.  Comments on domestic demand prospects were upbeat, and officials are confidently hopeful that exports, which have been weak, will respond to strengthening growth in Japan’s foreign markets.  New quarterly forecasts unveiled in the report revised projected growth in the current fiscal year through March 2015 downward to 1.1% from 1.4% predicted three months ago and a forecast of 1.5% made in October.  The report does not change projected GDP growth of 1.5% in fiscal 2015 and introduces a forecast of 1.3% for growth in fiscal 2016.  Without the higher consumption tax, which rose to 8% from 5% at the start of April 2014 and is to go to 10% in October 2015, GDP would likely expand by 1.8% in fiscal 2014 and 1.3% in fiscal 2015.

These meager growth rates still exceed Japan’s non-inflationary rate of potential GDP, which is presently only 0.5% per year and likely to rise but only gradually.  As a result, the gap between actual GDP and theoretical GDP is all productive resources were used — the so-called output gap — will continue to shrink.  This is the basis of the prediction of a further escape from deflation.  The consumption tax hike helps too.  Without that factor, core CPI is projected to rise 1.3% in fiscal 2014, 1.9% in fiscal 2015, and 2.1% in fiscal 2016. 

The Outlook also explores various upside and downside risks to its baseline forecast.  A big uncertainty and potential downside risk concerns external economies and the possibility that export demand remains weak.  It is the intention of Governor Kuroda and his cohorts to retain a quantitative and qualitative stimulus for “as long as it is necessary for maintaining a price stability target of 2% in a stable manner.”  They have promised to bring even more stimulus to the table if needed by appear to believe strongly that such will not come to pass.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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