Another Bank of Japan Surprise

April 28, 2016

The BOJ Board did not change any policy settings at this week’s meeting, surprising analysts and investors who almost universally were anticipating the unveiling of new stimulus.  Ever since a Japanese discount rate hike on Christmas Day 1989, I’ve learned to expect anything from Japan’s central bank.  It is ingrained in the institutional culture there that unpredictability is a virtue and a tactical advantage.  Surprise is its own reward.  Other traits are a predisposition to erring on the side of too low rather than too high inflation, a love of incrementalism at most times, but also a willingness to try shock and awe on occasion.  Rhetoric from BOJ officials has to be taken with a grain of salt.  To verbally suggest one policy action but actually do something quite different is fair game, since surprise can amplify a market’s reaction. 

In current circumstances, the decision not to raise stimulus is understandable.  Actions taken in January including the introduction of a negative interest rate failed to produce the desired currency market reaction.  Those changes occurred only three months ago, too short a period to comprehensively assess their effectiveness and impact.  More generally, negative central bank interest rates at several central banks currently have been an object of concern because of unknown possible adverse effects on money market functionality.  Indeed today’s vote to continue applying a negative 0.1% interest rate to the Policy-Rate Balances in current accounts held by financial institutions at the BOJ drew dissents from Mr. Sato and Mr. Kiuchi “because negative interest rates would impair the functioning of financial markets and financial intermediation as well as the stability of the JGB market,” according to the released statement on monetary policy.

A broader quarterly Outlook for Economic Activity and Prices that was also published today presented a baseline view and enumerated risk factors that did not deviate much from the previous one despite downwardly revised projections for growth and core inflation.  The evolution of such forecasts over the past year is shown in the two tables below, first of GDP growth.  Dates refer to when new forecasts were published.

GDP, % Fiscal 2016 Fiscal 2017 Fiscal 2018
April 2016 1.2% 0.1% 1.0%
January 2016 1.5% 0.3%  
October 2015 1.4% 0.3%  
July 2015 1.5% 0.2%  
April 2015 1.5% 0.2%  
January 2015 1.6%    


Core CPI Fiscal 2016 Fiscal 2017 Fiscal 2018
April 2016 0.5% 1.7% 1.9%
January 2016 0.8% 1.8%  
October 2015 1.4% 1.8%  
July 2015 1.9% 1.8%  
April 2015 2.0% 1,9%  
January 2015 2.2%    


The were a few changes, nonetheless:

  • The timing of when 2% inflation is now expected to be sustainably secured was broadened to sometime between April 2017 and March 2018.  Before the target date had been April 2017 – September 2017.
  • Current personal consumption performance was downgraded slightly.
  • The Kumamoto earthquake recently is a new downside factor affecting industrial production and demand in that area.
  • Note is made that business sentiment has become somewhat more cautious.
  • Projected growth in potential GDP, which hinges on supply-side conditions, was revised to a range of 0.0-0.5% from 0.5%.  That suggests it will take a lower rate of real growth to put upward pressure on inflation.
  • Base-pay rises this year are assumed likely to be somewhat less than last year.
  • The baseline forecast mentions past yen depreciation as a development that will lend positive support to inflation through an improved output gap and rising price expectations.
  • The more pressing matter of unwanted yen appreciation this year only gets handled in the rundown of negative risks to the inflation forecast.  A yen rise’s dampening effect on import prices could spread to domestic prices.
  • Doubt is cast on worries about a “gradual pullback in financial intermediation brought about by downward pressure on financial institutions’ profits due to low interest rates is judged as not significant, because financial institutions have sufficient capital bases that will allow them to continue health risk taking.”

The BOJ Board next meets in June around the same time as the next FOMC meeting.  In his press conference, Kuroda dispelled that inaction today reflects a lack of ability to reflate monetary policy further, leaving the door open to the possibility that it could ease in June.  Directionally opposite moves by the Fed and BOJ at the same time just might produce a more favorable yen reaction that what ensued after the January and April meetings of this year.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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