Bank of Japan

July 15, 2014

The Policy Board deliberated for five hours five minutes over two days.  Monetary policy, which last changed in a significant way fifteen months ago, was deemed appropriate to continue as is.  The economic forecast of moderate recovery, stationary core CPI inflation near term but then rising gradually, and higher expected inflation was maintained as well.  In new forecasts, which are compiled every three months, the only modification from figures announced in April was a modest adjustment in projected fiscal 2014 growth to 1.0% from 1.1%.  (Japanese fiscal years run from April through March, and we are currently in their fiscal 2014 year.)  GDP growth of 1.5% in fiscal 2015 and 1.3% in fiscal 2016 are assumed.  Since potential GDP is assumed to advance only 0.5% per year, excess capacity declines gradually in the forecast period, and this development is the main driver behind the projected climb in core CPI inflation to a target of 2.0%. 

The timing goal for reaching 2.0% and creating conditions for keeping 2% inflation even as an exit strategy from the ultra-accommodative monetary policy is implemented is April 2015.  However, a core principle of the current stance is that its end-point not be pre-announced but rather be dictated by future economic data.  This principle has been supported by eight of the nine policymakers and means that quantitative easing now, unlike past episodes of QE, is open-ended.  QE could be extended into the start of fiscal 2016 and, in all likelihood, probably will. 

A key point made during Governor Kuroda’s post-meeting press conference was the assertion that the yen will face much more downside than upside risk in the future as Japan lags the normalization of monetary policies elsewhere, most notably that of the Fed.  It was conceded that exports have not performed as well as hoped, and faster exports are to be a key driver of economic growth from now onward.  Kuroda has always dangled out the possibility of even more forceful monetary stimulus if, but only if and when, such is considered necessary to meet the inflation target.  Increasingly, his comments have discouraged investors from thinking such a recourse will in fact occur. 

Mid-2014 represents 63% of the way through the two-year span that officials initially thought it would take to get 2% inflation.  In the year to 2Q, M2 money advanced 3.2%, but bank lending went up just 2.2%.  Core inflation in the year to May was 3.4% but in fact 1.4% if one abstracts from the impact of April’s 3-percentage point consumption tax hike.  The monetary base, over which the BOJ exerts most direct control, advanced 42.6%.  Overnight money rates are hovering around 0.065% now and have not surpassed 0.5% since September 1995.  The ten-year JGB has averaged 0.65% over the past year and is currently at 0.53%.  Monthly data for April-June point to a large contraction of real GDP last quarter following a sharp advance in 1Q but are also consistent with a stabilization of trends late in the quarter.

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

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