Bank of Japan Board Keeps Settings and Upgrades Assessment

December 19, 2014

After meeting for five hours 51 minutes on Thursday and Friday, the BOJ retained the augmented quantitative stimulus guidelines agreed by an 8-1 vote at its October 31 meeting.  Takahide Kiuchi dissented again, as he favors reverting back to the less aggressive stimulus settings before October 31.  Somewhat surprisingly, the Board’s economic assessment was upgraded, thus reducing any chance for another augmentation of stimulus anytime soon.  The November overall assessment of moderate recovery as a trend had been qualifed by the observation of remaining post-consumption tax headwinds, but the December assessment notes that the drop in demand is now waning.  Specifically, there are now signs of a pick up in exports, which had been flat.  Housing shows signs of bottoming out.  In November, such signs were merely starting.  Industrial production still showed weakness in November associated with inventory adjustments.  By this month, progress in such adjustments could be reported, and this has enabled industrial output to start bottoming out.  November’s report predicted the post-tax drop in demand would dissipate “gradually,” a qualifying adverb that was deleted from the December assessment.

The BOJ goes into 2015 with a zero interest rate policy, reinforced with asset buying mostly but not exclusively of long-term JGBs with the intent of lengthening JGB portfolio’s average maturity to 7-10 years and of growing the monetary base by 80 trillion yen a year.  Lower oil prices will keep core CPI inflation around 1% for now, Board members believe, and they continue to be conspicuously vague about the timing of a resumed uptrend to 2.0%.  It clearly will not be reached by the initial target date of March 2015.  Quantitative easing is an open-ended commitment that will end only when 2% core inflation is believed to be at hand and sustainable.  The dissenting hawk, Kiuchi, still prefers that QE have a limited duration of two years, regardless of whether such achieves its mission in that span.  The more upbeat assessment, reinforced in Governor Kuroda’s post-meeting press conference, reduces the likelihood of a second augmentation of policy stimulus, something that many analysts were expecting at one of the two scheduled meetings next April.

Notwithstanding the BOJ’s expression of greater satisfaction with economic conditions and prospects, core CPI inflation, excluding the direct impact of the sales tax hike in April as well as prices for fresh food, slipped under 1.0% in October to 0.9%, 1.1 percentage points from the eventual target.  The BOJ Board has scheduled policy announcements next year for January 22, February 18, March 11, April 8, April 30, May 21, June 13, July 15, August 8, September 4, October 7, October 31, November 19, and December 19.

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



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