No Surprises from the Bank of Japan

July 15, 2010

By a unanimous 9-0 vote, the fully-staffed BOJ Policy Board kept its overnight uncollateralized interest rate at 0.1% and promised to maintain an “extremely accommodative financial environment” to combat “the critical challenge of overcoming deflation.”  The rate has not been modified since a cut of 20 basis points in December 2008, nor has it exceeded 0.5% since September 1995.  Central bank monthly outright purchases of Japanese government bonds have been set at 1.8 trillion yen since an increase from JPY 1.4 trillion in March 2009.

The assessment of the economy was not changed.  Officials project a continuing recovery.  Core CPI is presently negative because of excessive aggregate demand, but the degree of on-year core deflation is projected to diminish as slack in the economy gets trimmed.  Presently, exports and industrial production are increasing, profits and business confidence are improving, and consumption is picking up generally with somewhat less severe job and income conditions. Financial conditions show signs of easing, and public investment continues to decline.  Risks to the baseline growth and price forecasts are two-sided and, presumably, balanced though the Policy Board statement does not explicitly say that.

New quarterly growth and price forecasts embody just one significant revision, an upward adjustment to projected GDP growth in the present fiscal year to March 2011.  Such is now seen at 2.6% compared to forecasts of 1.8% made in April and 1.3% made six months ago.  A 1.9% growth rate has been penciled in for next fiscal year.  Core inflation in fiscal 2011 remains at 0.1%, implying an end to deflation but only barely.  There is no allowance for Murphy’s Law.  0.1% remains well below the level most central bankers find consistent with price stability.  The ECB, for instance, uses a definition of “below, but close to, 2.0%.”  Domestic corporate goods prices are expected to rise by 1.2% this fiscal year and by 0.8% in FY11.  The table below gives the evolution of the central bank’s GDP and core CPI projections since those made in April 2009.

  04/09 07/09 10/09 01/10 04/10 07/10
FY09 -3.1% -3.4% -3.2% -2.5% -2.2% n.a.
FY10 +1.2% +1.0% +1.2% +1.3% +1.8% +2.6%
FY11     +2.1% +2.1% +2.0% +1.9%
Core CPI            
FY09 -1.5% -1.3% -1.5% -1.5% -1.6% n.a.
FY10 -1.0% -1.0% -0.8% -0.5% -0.5% -0.4%
FY11     -0.4% -0.2% +0.1% +0.1%

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



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