Bank of Japan Review

April 30, 2010

The Bank of Japan kept its uncollateralized overnight call rate target at 0.1%, the level since December 2008, and released a new Outlook for Economic Activity and Prices.  Projected real GDP growth in the current fiscal year (April 1 – March 31) was revised upward by a half percentage point to +1.8%, while the growth estimate for next fiscal year was bumped down a tenth to 2.0%.  Core CPI is still expected to drop 0.5% this fiscal year, but the forecast for fiscal 2011 was revised into the black (albeit only to 0.1%) from minus 0.2% predicted three months ago.  Likewise, the signs on forecasts for domestic corporate goods prices were switched, specifically from negative 0.5% to plus 1.3% this fiscal year and from minus 0.4% to plus 0.7% for fiscal 2011.  These revised positive inflation projections back up the assertion of BOJ officials that deflation is on a receding course and that the effect of Japan’s very accommodative monetary stance on inflation and monetary trends will intensify as recovery takes hold.

So while professing complete allegiance to the goal of ending deflation and restoring a desired inflation rate centered on 1% but below 2%, Bank of Japan officials continue to resist politician calls that more monetary easing be done.  Interestingly, the new report pencils in an assumed potential GDP growth rate, that is the rate above which excess slack in resources will diminish, at just +0.5%.  Prior to 1990, by comparison, Japan was judged to be in recession anytime that actual GDP slipped under 3.0% for consecutive quarters.  The latest report deflects attention away from monetary policy by warning of two non-monetary risks.  One is Japan’s unprecedented and still cresting level of debt.  The other involves the demographics of a low Japanese birth rate, aging population, and shrinking overall population which collectively mandate that productivity growth quicken or else.

BOJ officials still look for faster-than-potential economic growth in FY10 and FY11 that picks up some pace after September, with core inflation possibly moving into the black in the second year of the forecast.  For policy purposes, officials will be excluding the impact of planned high school tuition subsidies, which otherwise will depress the CPI figures and keep such in the red.  The only concrete announcement change today was to formally end the purchase of equities held by commercial banks, an unconventional measure adopted in February 2009.  Today’s single-day meeting of four hours and 13 minutes was squeezed into Golden Week, which began Thursday and continues with Japanese markets being Monday-through-Wednesday.

The new forecasts and the evolution of previous GDP and core CPI projections is shown below.

  01/09 04/09 07/09 10/09 01/10 04/10
FY09 -2.0% -3.1% -3.4% -3.2% -2.5% -2.2%
FY10 +1.5% +1.2% +1.0% +1.2% +1.3% +1.8%
FY11       +2.1% +2.1% +2.0%
Core CPI            
FY09 -1.1% -1.5% -1.3% -1.5% -1.5% -1.6%
FY10 -0.4% -1.0% -1.0% -0.8% -0.5% -0.5%
FY11       -0.4% -0.2% +0.1%

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



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