Bank of Japan Downgrades Assessment But Leaves Policy Unchanged

January 24, 2012

Japan’s target overnight interest rate remains in a range of zero to 0.1% and the asset purchase plan’s size remains at JPY 55 trillion.  The current interest rate has remained as such since October 2010, and quantitative easing was last expanded in October 2011.  Current account balances held by banks with the BOJ have averaged JPY 32.03 trillion since mid-2011, way more than is required, and that is how officials are keeping short-term interest rates pinned near zero and 10-year yields hovering around 1.0%.

The monthly assessment of the economy was downgraded, a move that had already been foreshadowed.  Activity is now more or less flat and expected to remain as such "for the time being."  Likewise, core CPI inflation will hover near zero also "for the time being."  The Policy Board is committed to not begin raising interest rates until core inflation moves to the center of a 1-2% corridor, which constitutes the boundaries of what a majority of policymakers associate with "price stability."  A gradual return to a path of economic recovery is not expected until the second half of fiscal 2012, that is after summer.

A statement released by the Bank of Japan after five hours and 40 minutes of discussion over two days included new macroeconomic forecasts.  The table below shows the latest and earlier evolution of the projections for GDP and core inflation.  GDP is now projected to contract 0.4% in the current financial year that ends in March.  That’s a downward revision from expansion of 0.3% projected three months ago and an estimate of 1.6% made a year ago in January 2011.

  04/10 07/10 10/10 01/11 04/11 07/11 10/11 01/12
FY11 +2.0% +1.9% +1.8% +1.6% +0.6% +0.4% +0.3% -0.4%
FY12     +2.1% +2.0% +2.9% +2.9% +2.2% +2.0%
FY13             +1.5% +1.6%
Core CPI                
FY11 +0.1% +0.1% +0.1% +0.3% +0.7% +0.7% 0.0% -0.1%
FY12     +0.6% +0.6% +0.7% +0.7% 0.1% 0.1%
FY13             +0.5% 0.5%

The Policy Board will be next meeting on February 13-14

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



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