Bank of Japan Preview: Bigger Asset Purchase Plan Possible

January 23, 2012

The BOJ Policy Board is holding its first meeting of 2012, a 2-day deliberation that concludes Tuesday.  The target for the overnight uncollateralized money rate will be reaffirmed unanimously at a range of zero to 0.1% since October 2010.  This policy is sometimes called ZIRP and was popularlized in Japan in 1999-2000 and again 2001-6. 

The other main policy tool is the asset purchase plan, a form of quantitative easing.  This was introduced in October 2010 at JPY 35 trillion, raised by JPY 5 trillion to JPY 40 trillion in March 2011, increased another JPY 10 trillion to JPY 50 trillion in August 2011, and last raised in October to JPY 55 trillion.  Another expansion of this policy is possible now.  For one thing, the Bank of Japan’s economic assessment was downgraded from picking up steadily to picking up in October, picking up but at a moderating pace in November, and "a pause in the pickup" due to the elevated yen and adverse overseas developments in December.  Japan’s all-industry index fell 1.1% in November when industrial production and service-sector activity fell by 2.7% and 0.8%.  Exports posted a 3.1% on-year drop in November on a settlements basis and by 8.3% on year in December 10-20 on a customs clearance basis.  Unemployment in November at 4.5% was 0.4 percentage points higher than in September, real household spending sank 1.3% on year in November (most since March 2011), retail sales that month were 2.5% lower than a year before, and core inflation is lower than zero.  The Bank of Japan’s own Branch Managers survey revealed a recent deterioration of economic conditions in seven of Japan’s nine regions.

Not all recent data have been poor, so a change in monetary policy is not a sure shot and certainly not the expectation of everyone.  Core machinery domestic orders rebounded 14.8% in November.  The economy watchers index showed lessening pessimism last month, and data for department store and supermarket sales in December produced better results.

An Interim Assessment to update last October’s semiannual macroeconomic report will be released after the policy rate decision and will include new quarterly forecasts of core inflation and economic growth.  The forecasts three months ago called for GDP to rise by 2.2% in fiscal 2012 starting this April and 1.5% in fiscal 2013.  Core CPI inflation is projected at more than zero in both years.  Downgrades in both of these indicators could help officials to explain further monetary easing at this time.  The evolution of the quarterly forecasts is documented below.

  01/10 04/10 07/10 10/10 01/11 04/11 07/11 10/11
FY11 +2.1% +2.0% +1.9% +1.8% +1.6% +0.6% +0.4% +0.3%
FY12       +2.1% +2.0% +2.9% +2.9% +2.2%
FY13               +1.5%
Core CPI                
FY11 -0.2% +0.1% +0.1% +0.1% +0.3% +0.7% +0.7% 0.0%
FY12       +0.6% +0.6% +0.7% +0.7% 0.1%
FY13               +0.5%

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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