Bank of Japan: New Quarterly Forecasts But No Policy Changes

January 26, 2010

The target interest rate on uncollateralized overnight money was voted by a unanimous 7-0 decision to remain at 0.1%, its level since December 2008.  No new unconventional policy measures were taken by the Policy Board following five hours and 38 minutes of deliberations over two days. Growth and price forecasts, last made in October, were revised to show less pronounced deflation and essentially the same view on growth.  Minutes of this week’s meeting will be released February 23, but the monthly economic assessment is due tomorrow.

The evolution of the forecasts for fiscal 2009, fiscal 2010 and fiscal 2011 (which ends March 2012) are shown below.  The dates in each column represent the succession of ensuing forecast releases.  The estimates signify median point forecast among Board members.

  10/08 01/09 04/09 07/09 10/09 01/10
FY09 +0.6% -2.0% -3.1% -3.4% -3.2% -2.5%
FY10 +1.7% +1.5% +1.2% +1.0% +1.2% +1.3%
FY11         +2.1% +2.1%
Core CPI            
FY09 0.0% -1.1% -1.5% -1.3% -1.5% -1.5%
FY10 +0.3% -0.4% -1.0% -1.0% -0.8% -0.5%
FY11         -0.4% -0.2%


The baseline forecast still embodies continuing economic recovery, at first very moderate and concentrated in exports and somewhat faster from next October onward as domestic demand joins in.  This scenario seems overly optimistic.  Negative changes in core CPI are forecast throughout the period, but the extent of deflation is small and diminishing, which gives the Bank of Japan justification to press on with the status quo.  Slack in the economy is identified as the main factor for deflation, but the escape is paved largely with rising commodity prices.  A statement released by officials today promises “to maintain the extremely accommodative financial environment.”

Bank of Japan officials talk a looser policy than they actually conduct.  Fact, policy is not as accommodative as it was in the middle of the last decade.  The key interest rate was only reduced by 40 basis points since the start of the global recession, and quantitative easing was less dramatic than what the Fed, bank of England and others did.  The Bank of Japan has not undertaken sufficient actions to counteract the drag from the yen’s appreciation of 32% against the dollar and 29% against the euro since end-July 2007.  The statement released today fails to note a number of worrisome indicators released recently and noted in my BOJ preview posted yesterday.  Markets will continue to anticipate more stimulus getting introduced at either the central bank’s February or March meetings.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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