Bank of Japan Review

January 22, 2013

Reaction to this month’s eagerly awaited central bank meeting has been mixed.  Some analysts have stressed that the accommodative stance was strengthened for a fourth time since September and that the Bank of Japan, like the Fed, has tied the duration of quantitative easing to future economic trends, not some pre-announced date in the future.  Other analysts stressed that today’s collection of decisions includes no surprises.  The decisions to stimulate were not all taken unanimously by Board members, and the main innovation of open-ended asset buying will not become effective until a year from now.  Meantime,

  • The overnight interest rate target remains at zero to 0.1% where such has been since October 2010.
  • The parameters for asset buying in 2013 were left unchanged.  The total at end-2013 will be JPY 101 trillion.
  • Price stability was redefined at a higher 2% and assigned “target” status from “goal” status.  But the BOJ retains considerable latitude in deciding how 2% should be achieved without causing undue collateral damage.
  • A proposal to enforce the 2% target more mechanistically was rejected by a vote of 8-1, and two of the nine policy makers dissented from the decision to introduce asset buying without a termination date in 2014.
  • A joint statement released by the Abe Cabinet and the Bank of Japan enumerates obligations of the government (e.g. structural reforms) as well as the agreed changes to be undertaken by the central bank in the quest to end deflation.
  • New price and inflation forecasts were released, which the BOJ routinely does on a quarterly basis.  GDP is projected to rise 1.0% in the current fiscal year, 2.3% in fiscal 2013, and 0.8% in fiscal 2014.  Core CPI is forecast to drop 0.2% this fiscal year, then rise 0.4% in fiscal 2013 and 2.9% in fiscal 2014.  Excluding the impact of planned consumption tax increases, core CPI is expected to rise by 0.9% in the year to March 2015 (FY14).  The table below compares the latest macroeconomic projections to the evolution of earlier estimates (Note that core CPI for fiscal 2014 exclude the impact of a planned consumption tax hike).
  04/11 07/11 10/11 01/12 04/12 07/12 10/12 01/13
FY12 +2.9% +2.9% +2.2% +2.0% +2.3% +2.2% +1.5% +1.0%
FY13     +1.5% +1.6% +1.7% +1.7% +1.6% +2.3%
FY14             +0.6% +0.8%
Core CPI                
FY12 +0.7% +0.7% 0.1% 0.1% +0.3% +0.2% -0.1% -0.2%
FY13     +0.5% 0.5% +0.7% +0.7% +0.4% +0.4%
FY14             +0.8% +0.9%


Markets are viewing today’s actions with skepticism.  After softening through 90 per dollar, the yen strengthened back into the high 80s, and the Nikkei closed lower on Tuesday.  Fundamental doubt centers on the ambiguity of when Japanese on-year inflation might approach 2.0%.  Years of claiming to be cooperating with government wishes to end deflation have yet to achieve a sustainable positive inflation rate.  Last February, a goal of 1% was adopted, and that didn’t end deflation, either.  Today’s decision to redefine price stability and double the goal, now called a target, to 2%, has been packaged in a framework that retains considerable subjective wiggle room for policymakers.  It is additionally conspicuous that the Bank of Japan did not tie the need for additional significant  yen depreciation to the achievement of a sustainable core inflation rate of 2.0%.  It’s an omission policymakers will come to regret.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.


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