Bank of Japan

December 20, 2016

The final BOJ Board meeting of 2016 left all policy settings unchanged as expected. A released statement upgraded economic conditions and prospects, proclaiming that “Japan’s economy has continued its moderate recovery trend and is likely to turn to a moderate expansion”¬†and deleting previous qualifying language that warned “sluggishness is expected to remain in exports and production for some time.” Each of these elements is now seen to be “picking up.” The policy framework was modified three months ago. While somewhat less emphasis was placed on achieving 2% core inflation as quickly as possible, elements of yield curve control and greater guidance to dampen expected inflation were added then.

At the subsequent October 31-November 1 Board meeting, policy was left unchanged just like today’s despite downwardly revised inflation forecasts, and the predicted date for securing 2% inflation in a stable manner was pushed outward yet again to the spring of 2019, which is beyond the end of Governor Kuroda’s 5-year term. Today’s decision to leave policy unchanged was agreed by a 7-2 vote with Sato and Kiuchi dissenting as they had done at the prior meeting. A negative 0.1% central bank interest rate will continue to be associated with the Policy Balances held by financial institutions with the BOJ. A target of around zero is being maintained on the 10-year JGB yield. JGB purchases per year will be about JPY 80 trillion, and there is a continuing commitment to expand the monetary base until 2% inflation is restored.

While the last two Board meetings produced identical decisions, it is noteworthy that this time the 10-year JGB yield was as above zero percent as it had been previously below that level. The yen is considerably weaker than it had been, and share prices are much firmer. At the end-October meeting, the concern was that the economy may be weakening and that inflation had dropped below zero again. The policy suffered from low market credibility. Although core CPI remains negative and third-quarter GDP growth got revised sharply lower to 1.3% at an annualized rate from 2.2% estimated initially, the yen’s dive lies behind a much more upbeat economic prognosis, so much so in fact that Kuroda’s press conference will be remembered for his dismissal of new speculation that the BOJ could soon hike its short-term interest rate. The next Board meeting is scheduled for the end of next month.

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

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