Bank of Japan Review

April 26, 2013

The nine-person Policy Board released a two-sentence statement affirming by unanimous vote to “conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen.”  The decision implicitly pins the overnight money rate to a range of zero to 0.1%.  This was the second meeting of the Kuroda governorship and the second meeting this month, and it’s main purpose was to release the semi-annual Outlook for Economic Activity and Prices.  The report includes upwardly revised forecasts of GDP growth and core inflation for both fiscal 2013 that began this month and fiscal 2014.  Fiscal 2015 forecasts were introduced, and these are above those of FY14.

The evolution of these projections, which are made on a quarterly basis, are documented in the table below where the right-month column contains the latest thinking of BOJ officials.

  07/11 10/11 01/12 04/12 07/12 10/12 01/13 04/13
FY12 +2.9% +2.2% +2.0% +2.3% +2.2% +1.5% +1.0% +1.0%
FY13   +1.5% +1.6% +1.7% +1.7% +1.6% +2.3% +2.9%
FY14           +0.6% +0.8% +1.4%
FY15               +1.6%
Core CPI                
FY12 +0.7% 0.1% 0.1% +0.3% +0.2% -0.1% -0.2% -0.2%
FY13   +0.5% 0.5% +0.7% +0.7% +0.4% +0.4% +0.7%
FY14           +0.8% +0.9% +1.4%
FY15               +1.9%


The report speaks of a coming “virtuous cycle” of reinforcing improvement in production, income, and spending” that hinges on generally stable global financial markets, strengthening foreign demand amplified by yen depreciation, steady implementation of quantitative and qualitative monetary easing, increasing government investment, and rising long-term growth expectations among firms and households.  BOJ officials expect a “moderate recovery path” to be established by mid-2013 (presumably meaning the end-September middle of fiscal 2013 rather than end-June).  Growth will be be distorted by two scheduled value-added tax increases — enhanced by 0.3 percentage points (ppts) this fiscal year and by 0.2 ppts in FY15 but reduced by 0.7 ppts in FY14.  In spite of such shocks, growth throughout the forecast period is expected to surpass Japan’s estimated potential uptrend in GDP, which is only 0.5%.

Faster actual than potential GDP growth will cause Japan’s output gap to shrink, imparting an upward trend to demand-pull inflation.  BOJ officials also assume that nominal wages experience faster growth.  This is an issue that Governor Kuroda’s critics have raised, for if price inflation but not wage inflation accelerates, real wages will shrink, depressing personal consumption and short-circuiting the virtuous cycle presented in the BOJ report.  A final source of faster inflation, according to BOJ thinking, will be rising import prices in line with yen depreciation.  If all goes according to plan, CPI inflation will become positive around the middle of 2013 and continue rising gradually toward the goal of 2% by late 2014/early 2015.  The new price inflation forecast, though higher than projected in January, remains marginally below 2.0% in Fiscal 2015, which begins in March of that year.  This refutes a separate criticism that a doubling of the monetary base could cause inflation to overshoot the 2% target.

Today’s publication, like earlier semi-annual Outlooks, devotes considerable space to exploring all upside and downside risks to the baseline growth and price projections.  Officials conclude that uncertainty is high but on balance risks to growth and to price inflation are each rather balanced around the baseline.

Following today’s released announcements, the yen strengthened.  That was not the reaction that officials were seeking.

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

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