Bank of Japan Updates Forecasts and Leaves Key Rate Range at Zero-0.1%

January 25, 2011

Following five hours and 53 minutes of deliberations over two days, the BOJ’s Policy Board retained a 0.0-0.1% target range on overnight money rates in a unanimous 9-0 vote. The target had been eased in early October from a point estimate of 0.1% where such had been since December 2008.  The overnight target has not been above 0.5% since September 1995. 

The baseline forecast remains the same.  The recovery’s pause should be “gradually overcome,” led by strengthening foreign demand.  Officials observe that housing and investment have started to pick up but that consumer demand for some goods suffered a reverse after strong gains.  Exports are somewhat weak, causing industrial production to decline slightly.  The degree of severity surrounding income and jobs has eased somewhat, and the downward trend of consumer price inflation has slowed.  Monetary policy is accommodative in a comprehensive way to ensure financial stability and support a strengthening foundation for future growth.  In addition to very low interest rates, the BOJ is conducting asset purchases to depress long-term rates.

New BOJ forecasts, which are updated on a quarterly basis, were reversed.  The evolution of these forecasts is shown in the table below.  FY10 ends in March 2011.  Projected growth in this still-unfolding year was revised sharply higher to 3.3% from 2.1%, but the estimated growth rates in the coming two years got bumped downward slightly to an average pace of 1.8% per annum.  Core CPI inflation next fiscal year was revised to a slightly more positive but nonetheless low 0.3%, and the FY12 core inflation forecast remains at 0.6%.  Japanese officials generally have a lower notion of price stability closer to 1% versus, for example, “below but close to 2%” in the view of ECB officials.  Projected core CPI in FY12 of 0.6% thus remains on the low side of even the BOJ’s comfort zone.

  10/09 01/10 04/10 07/10 10/10 01/11
FY10 +1.2% +1.3% +1.8% +2.6% +2.1% +3.3%
FY11 +2.1% +2.1% +2.0% +1.9% +1.8% +1.6%
FY12         +2.1% +2.0%
Core CPI            
FY10 -0.8% -0.5% -0.5% -0.4% -0.4% -0.3%
FY11 -0.4% -0.2% +0.1% +0.1% +0.1% +0.3%
FY12         +0.6% +0.6%


The Policy Board’s next scheduled meeting is February 14-15.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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