Bank of Japan Very Comfortable with the Current Degree of Accommodation

January 22, 2014

It came as no surprise that the BOJ Board left all policy settings unchanged.  The monetary base is being increased at a rate of 60-70 trillion yen a year.  The overnight uncollateralized money rate is to stay pinned between 0.0 and 0.1%; such has lately averaged 0.07%.  Stimulus is aggressively loose both quantitatively and qualitatively.  Central bank holdings of JGBs are expanding 50 trillion a year, and their average maturity is being widened sharply to seven years by this time next year.  Other assets like ETFs, REITs, commercial paper and corporate bonds are also getting bought.  The policy has an element of forward guidance.  The goal is 2.0% core CPI inflation by April 2015 with a concurrent belief that such will be maintained.  Stimulus is open-ended in the sense that mission is not defined by a time limit and will not be abandoned until the job is finished.

There’s a promise, too, to enact additional monetary stimulus if a time comes when that is deemed necessary to get the job done, but this month’s Board meeting ended with stronger conviction than before that extra effort will be avoided.  Growth and inflation are proceeding as officials at the central bank had envisaged.  In fact, core inflation recently moved even higher to about 1.25% from 1.0% before.  In response to the government’s planned consumption tax hike to 8% in April from 5% now, GDP growth is projected to speed up this quarter but slow in 2Q.  Importantly, the post-tax lull is projected to be just that, a temporary let-up.  New macro forecasts bumped GDP expansion in the year to April 2015 down 0.1 percentage point to 1.4% but retained an estimate growth rate of 1.5% in the following year.  Core inflation is seen climbing from 0.7% in the present fiscal year to March 2014 to 1.3% in the year to March 2015 (and 3.3% including the 2.0 percentage point upward thrust from the tax hike) and finally 1.9% in the year to March 2016 (2.6% including another tax hike to 10% planned for October 2015). 

Private analysts had been forecasting new stimulus being unveiled by the BOJ in March or April.  Governor Kuroda would have to do an about-face of monumental proportions to satisfy such speculation.  He essentially said today that the BOJ will undertake additional stimulus only in the face of signs that the economy stalls longer than officials anticipate.  They won’t have such proof until sometime in the summer.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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