Bank of Japan Preview: No Further Changes Likely

March 12, 2012

Japanese quantitative monetary policy stimulus was extended after the previous BOJ Board meeting on February 13-14.  Ten trillion yen was added to a JPY 20 trillion pool of funds for asset purchases.  Incremental buying will entirely involve Japanese government bonds (JGBs), and such is supposed to be completed by the end of 2012.  In addition, the Board attempted to clarify what is meant when officials seek “medium-term price stability” by stipulating that such implies a 1% rate of core inflation.  A policy of virtual zero interest rates will be maintained until such is in sight and significant downside risk is not present.  Governor Shirakawa asserted that while Japan is edging closer to eradicating deflation, it will be a long time before 1% core inflation is secured.

No further monetary easing is likely to be forthcoming after this month’s Board meeting, which ends Tuesday.  Some positive developments have occurred since the February meeting.

  • The yen has depreciated more than 4.5% against the dollar and euro.  That’s a de facto easing of monetary conditions.
  • The contraction of fourth-quarter real GDP was revised to 0.7% annualized from 3Q versus a drop of 2.3% reported originally.  Non-residential investment spending soared 20.7%, revised up from 7.9%, and this revision accounted for 1.5 percentage points of the total revision in GDP growth.
  • The composite purchasing managers index surpassed 50.0 for a third straight month but was only at 51.2, implying stabilization more than expansion.
  • Core domestic machinery orders (+3.4% in January) and foreign machinery orders (+20.1%) exceeded expectations.
  • Officials have survey evidence pointing to a likely solid rise of industrial production this quarter.

All that is not to say that Japan is out of the woods, not by a long shot.  Many other indicators are soft, like February readings of 45.3 in small business sentiment, 39.1 in consumer confidence, and +0,6% on-year growth in bank lending.  Also, the largest monthly current account deficit was posted in January, and seasonally adjusted exports that month fell 4.4% while imports climbed 4.1%.  Plus, deflation isn’t really gone.  Japan does not exclude energy from its core inflation measure, which remains around negative 1.0% on the CPI when such is done.  The GDP deflator was 1.8% lower than a year before in 4Q11.  Corporate service prices are 0.2% lower than a year ago. 

It is rare for central bank officials to change policy at successive meetings except in extraordinary circumstances.  This is not one of those times.

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



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