BOJ Meeting and Semi-Annual Report

October 31, 2013

An An abbreviated statement was released following the Bank of Japan Board’s second meeting in October at which officials agreed to stay the course of a policy of quantitative and qualitative easing that was launched almost seven months earlier with the purpose of doubling the monetary base by March 2015 and raising such a a rate of 60-70 trillion yen per annum.  The main purpose of the meeting was to finalize for release the semi-annual Outlook for Economic Activity and Prices.  The meeting consumed four hours and nine minutes, and the report unveiled new quarterly macroeconomic forecasts.  Officials project rises in real GDP of 2.7% this fiscal year ending March 2014 followed by 1.5% in 2014 (revised from 1.3%) and 1.5% in fiscal 2015 (unrevised).  Forecasts for core inflation (excluding fresh food) are provided both with the impact of planned consumption tax hikes and without such.  After averaging 0.7% in the current year, core CPI is forecast to climb 3.3% in fiscal 2014 (1.3% abstracting from the sales tax hike) and 2.6% in fiscal 2015 (1.9% without the tax hike). 

A virtuous cycle among production, income, and spending is predicted over this period.  Both domestic demand and export demand contribute to the upswing, but domestic demand shoulders the main burden.  Since actual growth expands faster than the 0.5% estimated potential growth rate, the output gap diminishes, and inflation is created by demand-pull forces.  It is imperative, however, for wages to rise as well as prices.  Otherwise the income pillar of the virtuous cycle will fail to materialize.  Monetary conditions will become more accommodative over time.  Public investment remains high through the next twelve months, but quantitative easing keeps long-term interest rates low.  The impact of the consumption tax will be to increase GDP growth by some 0.3 percentage points (ppts) in FY13 and 0.2 ppts in FY15 but to exert a drag of 0.7 ppts next fiscal year.

The baseline scenario of officials foresees achievement of about 2% inflation and a sustainable growth path toward the latter half of the two-year projection period. Growth and price risks are deemed balanced in this highly uncertain period.   Officials detect “no sign at this point of excessively bullish expectations in asset markets or in the activities of financial institutions.”  The BOJ mission remains unchanged: to continue the present aggressive quantitative and qualitative easing for as long as it is necessary to achieve the 2% price stability target in a stable manner.  Further policy adjustments are promised if the target does not appear to be materializing, but so far officials are satisfied that such will happen with current monetary policy settings.

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



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