Bank of Japan Leaves Policy Unchanged, Downgrades Inflation Outlook

June 15, 2018

Following four hours six minutes of discussion on Thursday and Friday, the Bank of Japan Board voted 8-1 to maintain its policy of quantitative and qualitative monetary easing with yield curve control. The key elements of this stance are

  1. A negative 0.1% short-term policy interest rate target.
  2. A target of around zero percent on the 10-year JGB yield.
  3. Growing the monetary base by about 80 trillion yen per year with the intent eventually to lift and maintain core CPI inflation above the 2% target in a stable manner.
  4. Purchases of ETFs at a pace of JPY 6 trillion a year and J-REITS at JPY 90 billion.
  5. Maintaining amounts totaling JPY 2.2 trillion of commercial paper and JPY 3.2 trillion of corporate bonds.
  6. A broad pledge not to let up on this ultra-stimulative course until the inflation goal is met.

The sole dissent as has been the case at other recent meetings was cast by Kataoka, who favors augmenting the stimulus to account for the negative impacts of changed U.S. trade policy and monetary policy as well as a planned rise in Japan’s consumption tax next year.

Without changing the assessment of economic growth prospects, BOJ officials downgraded their view of inflation. The current range of CPI was lowered to 0.05-1.0% from 1.0%. Frustration is expressed that continuing moderate GDP expansion and a shrinking output gap have not lifted inflation or long- and medium-term inflation expectations. Clearly, they have concluded, years and years of negative inflation followed by sub-target inflation are maintaining a deflationary mindset. In this respect, Japan faces a vastly different circumstance than the United States or the euro area. And with the Fed persisting in a program of policy normalization and the ECB announcing an end to quantitative stimulus at end-2018 and a rise of interest rates sometime after mid-2019, BOJ officials chose this meeting to underscore that what the Fed and ECB are doing will not influence the timetable of future Japanese monetary policy.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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