Bank of Japan Left Monetary Policy Stance Unchanged and Released New Forecasts

April 30, 2015

The end-April single-day four hour board meeting released two statements.  The first release merely reaffirmed the parameters of its quantitative and qualitative stimulus, which has goals of a) expanding both the monetary base and BoJ holdings of Japanese government bonds by 80 trillion yen per year (about $670 billion) and b) lengthening the average maturity of the BOJ JGB portfolio to 7-10 year.   Similar to the early April meeting, Takehide Kiuchi proposed cutting the size of QQE back to 45 trillion year per year, and this recommendation was rejected by all eight other board members.

The second document released today is the semi-annual Outlook for Economic Activity and Prices.  Macroeconomic forecasts, which are revised quarterly, are included in this report.  The GDP growth forecast for fiscal 2015, which began this month and runs through March 2016, was bumped down 0.1 percentage point (ppt) to 2.0% but still above the forecasts that had been issued in July and October of 2014.  Growth in fiscal 2016 is expected to be 1.5%, a revision from 1.6% issued in January, 1.2% predicted last October and 1.3% forecast way back in July 2014.  A forecast for FY17 was shown for the first time, and growth then is put at a lowly 0.2% because of the drag of a 2-ppt consumption tax hike now planned for April 2017.

The new growth forecasts imply a moderate recovery trend with faster growth in activity than the 0.5% estimated rise of potential GDP.  Exports and industrial output have picked up.  Growth in corporate profits is historically elevated.  Consumption will be resilient, as the situations of income and jobs have improved.  Public spending, now at a high level, is assumed to slow moderately.  The balance between product supply and demand should cross into an excess demand position during the coming two quarters and continue more deeply into excess demand during fiscal 2016 before stabilizing in fiscal 2017. 

The implication of the BOJ’s view on the so-called output gap is that core inflation hovers near zero for the time being but accelerates toward the 2% target in the first half of fiscal 2016.  The revised path of core CPI inflation goes from 0.8% this fiscal year to 2.0% in FY16 and 1.9% in FY17.  The projections for FY16 and FY17 are each 0.2 ppts less than forecasts provided in July. 

Forward policy guidance, endorsed by all Board members except Kiuchi remains as before and is summed up in the following passage:

QQE has been exerting its intended effects. The Bank will continue with QQE, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will examine both upside and downside risks to economic activity and prices, and make adjustments as appropriate.

This is an open-ended mission with no imposed maximum duration of quantitative easing.  QQE will be removed when core inflation reaches 2%, and officials are confident that it will stay at that level even without the stimulus of continuing asset purchases.  Governor Kuroda in press conference conveyed two messages.  The first is that stimulus will be augmented further if but only a conclusion is reached that the current stance isn’t going to complete the mission.  There was a significant augmentation six months ago in the only modification since quantitative easing was launched at the start of April 2013.  Kuroda’s second message is that the underlying outlook for core inflation still shows steady improvement and attainment of 2.0% inflation in the first half of next fiscal year.  Many private analysts believe that QQE will be ramped even higher either in July or by October.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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