Bank of Japan Fleshes Out Details of Asset Purchase Program

October 28, 2010

The Bank of Japan held a single-day meeting lasting four hours and 26 minutes in which details were unveiled of the asset purchase program.  A unanimous 9-0 decision was made to keep virtual zero interest rates until price stability (core CPI of around 1%) is in sight.  This will take years, not months.  There was one dissenting vote against including Japanese government bonds and treasury bills in the asset purchase program. 

Officials also released a new quarterly Outlook with price and growth forecasts.  After contracting by 3.7% in FY08 and 1.9% in FY09, real growth is projected to recover at only a 2% per annum rate over the ensuing three fiscal years to March 2013, leaving considerable slack in Japan’s economy.  Note the fairly sharp downward revision of projected GDP growth in the present fisca year from 2.6% assumed in July to 2.1% assumed now.  It will take years for slack in productive resources to be reabsorbed, so the rate of decline in core CPI inflation will soften only gradually.  Positive core inflation will not return until some time between April 2011 and March 2012, and that’s only if the baseline scenario plays out.  Officials promise to weight downside growth risks more heavily than upside risks until that happens.  The last time the BOJ had a policy of zero interest rates, the rule of thumb for raising rates was a positive CPI of any sort.  The rule of thumb this time is for price stability, defined by most officials as core inflation of around 1%, to be clearly in sight.  That test will not be met for a couple of years.  The table below shows the evolution of the Bank of Japan price and GDP forecasts.  The columns are the dates of successive forecasts.

  04/09 07/09 10/09 01/10 04/10 07/10 10/10
FY09 -3.1% -3.4% -3.2% -2.5% -2.2% n.a. n.a.
FY10 +1.2% +1.0% +1.2% +1.3% +1.8% +2.6% +2.1%
FY11     +2.1% +2.1% +2.0% +1.9% +1.8%
FY12             +2.1%
Core CPI              
FY09 -1.5% -1.3% -1.5% -1.5% -1.6% n.a. n.a.
FY10 -1.0% -1.0% -0.8% -0.5% -0.5% -0.4% -0.4%
FY11     -0.4% -0.2% +0.1% +0.1% +0.1%
FY12             +0.6%


Yen strength promotes deflation in two ways: by depressing import prices and by eroding export competitiveness and therefore growth that is needed to reduce excess aggregate supply in the economy.  To underscore how seriously officials view the rising yen, the date of the next Policy Board meeting was moved inward to November 4-5 (right after the Fed unveils new quantitative easing) from November 15-16 as scheduled before.  This way officials can respond quickly to what the U.S. central bank does and to the instant reaction of the yen to the U.S. action.

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



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