Bank of Japan Preview

October 29, 2009

Japan’s central bank Policy Board has three orders of business to decide at Friday’s meeting.

The uncollateralized overnight money rate target has been 0.1% since last December and is unlikely to get raised for a couple of more calendar quarters.  Although Japan is coming out of recession, the economic outlook is fraught with risks, and deflation has returned.  Consumer prices fell over 2.0% in the year to August.

Officials will be deciding whether to extend any of its three unconventional quantitative measures, which have supplemented near-zero rates since the last time rates were reduced.  An 8-0 vote in July extended by three months the bank’s outright buying of commercial paper and corporate bonds, as well as fund-supplying operations to grease corporate finance.  Analysts are expected the last, but not the first two, of these programs to be kept.

Finally, a full review of the economic outlook is due, including the unveiling of new price and growth projections.  The central bank’s forecast will include Fiscal 2011, which ends in March 2012, for the first time. Officials express their projections both as ranges and as modal points within those boundaries.  The table below gives the history of the forecast during the last 18 months.  Column headers show the date of each forecast.  Back in July, officials would only say that economic conditions had stopped worsening.  That view has brightened progressively in the ensuing months, and officials earlier in October released a monthly assessment claiming that the economy “has started to pick up” and that “conditions are likely to improve gradually,” with private domestic demand remaining comparatively weak and situations for profits, jobs, and incomes “remaining severe.”  That report looks for only a very gradual rise toward zero in on-year core inflation.  a good chance exists that projected core CPI inflation in FY11 may be no higher than zero.  Dollar/yen was trading at 93.4 at the time when the last forecasts were released in mid-July, and the ten-year JGB yield was at 1.35%.

  04/08 07/08 10/08 01/09 04/09 07/09
FY08 +1.5% +1.2% +0.1% -1.8% -3.2%
FY09 +1.7% +1.5% +0.6% -2.0% -3.1% -3.4%
FY10 +1.7% +1.5% +1.2% +1.0%
Core CPI            
FY08 +1.6% +1.8% +1.6% +1.2% +1.2%
FY09 +1.0% +1.1% 0.0% -1.1% -1.5% -1.3%
FY10 +0.3% -0.4% -1.0% -1.0%



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