No Significant Surprises From Bank of Japan

October 30, 2009

The Bank of Japan promised to leave its uncollateralized interest rate at 0.1% “for some time” but took initial steps to rein in quantitative easing.  The decisions after four hours of deliberation were unanimous on the rate but included a dissent from Mizuno regarding the planned phase-out of unconventional steps to facilitate corporate financing.

The central bank also released a new Outlook for Economic Activity and Prices with new formal forecasts that 1) revise estimates made in July and 2) introduce projections for the first time for Fiscal 2011 ending in March 2012.  The estimates and their previous evolution of the new point forecasts are summarized in the table below.  As is their custom, officials also provide range forecasts.  The forecast growth ranges are +0.8 – 1.3% next fiscal year and +1.6 – 2.4% in Fiscal 2011.  As for core consumer price inflation, officials have penned forecasts of minus 0.7% to minus 0.9% in FY10 and minus 0.4% to minus 0.7% in Fiscal 2011.  The Outlook also includes projections for domestic corporate goods prices, which is a wholesale price index.  The point estimates for this are minus 1.4% in FY10 after negative 5.9% in the present fiscal year and minus 0.7% in FY11.

  07/08 10/08 01/09 04/09 07/09 10/09
FY09 +1.5% +0.6% -2.0% -3.1% -3.4% -3.2%
FY10 +1.7% +1.5% +1.2% +1.0% +1.2%
FY11           +2.1%
Core CPI            
FY09 +1.1% 0.0% -1.1% -1.5% -1.3% -1.5%
FY10 +0.3% -0.4% -1.0% -1.0% -0.8%
FY11           -0.4%


The text of the new BOJ Outlook stresses that high uncertainty will persist.  Growth is expected to be moderate until the fourth quarter of next year but to exceed the expansion rate of potential GDP thereafter.  However, there is a catch, and that is that officials now put the estimate of potential GDP growth — the supply-side limitation on how fast the economy would growth if all productive resources were used — at just 0.5%.  This means that once the economy’s slack is eliminated, almost any positive growth would be associated with accelerating inflation.  Given Japan’s record of deflation, not inflation, that’s a dubious claim.  In any case, it will be a long time before the hypothesis can be tested, because Japan will have unused capacity and labor for a good while longer.  The forecasts acknowledge that deflation is sticking around, and asks the key question of whether this will depress economic growthOfficials conclude it should not:

Given that the pace of the decline in prices is expected to slow down during the projection period, albeit modestly, and that the financial system and medium- and long-term inflation expectations are stable, it is unlikely that the decline in inflation will induce downward pressure on economic activity.

After a long discussion of the risk factors to the baseline forecast of moderate economic growth and a gradual reduction in the rate of deflation, the report concludes that Bank of Japan monetary policy should remain “extremely accommodative” to “provide steady support for Japan’s economy to return to a sustainable growth path with price stability.”

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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