Bank of Japan Puts Up a Good Front

January 21, 2015

The BOJ Board was not expected to change is quantitative monetary stimulus settings (QQE), and it didn’t surprise in that regard.  Less than three months ago, planned annual JGB purchases were increased from 50 trillion yen, which had been the plan since April 2013, to JPY 80 trillion, and the targeted average maturity of JGB holdings was lengthened to 7-10 years from seven.  But since those changes were announced October 31, oil prices had plunged, and core Japanese inflation, excluding the effect of a sales tax last April and prices of perishable foods, had dropped to just 0.7% versus a peak of 1.5% just seven months earlier and the central’s target of 2.0%.  The stage seemed set for an admission of policy failure.  Either the stimulus to date wasn’t enough or looser monetary policy was not a sufficient solution to eradicate Japan’s chronic deflationary tendency.  Since April 2013, QQE has supplanted the overnight money rate level as the cutting edge of monetary policy.  The rate continues to be confined between zero and 0.1%.  Unlike Switzerland, officials have not resorted to negative interest rates.

However, the tone of the statement released after this month’s Board meeting was anything but contrite or concerned.  The core CPI forecast for fiscal 2015, which starts this coming April, had to be cut to 1.0%, but officials asserted that the ultimate effect of lower energy costs on inflation will be upward because of the resulting boost to demand.  Forecasts of real GDP growth in fiscal 2015 were raised to 2.1% from 1.5% and for fiscal 2016 to 1.6% from 1.2% predicted back in October at the time of the enhancement of quantitative stimulus.  Moreover, without further change in policy, officials believe core inflation will climb to an average of 2.2% in fiscal 2016, which is a shade higher than was predicted in the October forecast.  Put differently, the statement predicts the contribution of lower energy costs to core inflation will be a drag of 0.75 percentage points in fiscal 2015 but a boost of 0.15 percentage points in the ensuing year.  Crucial to this conclusion, it should be noted, is the assumption that the cost of Dubai oil, now hovering around $55 per barrel according to the statement, will climb back to around $70 by the end of fiscal 2016. 

The January statement presents an overall economic assessment that is extremely similar to what was presented a month ago.

In one minor respect, policy was modified.  two policy initiatives introduced in 2010 and 2011 with incentives to encourage banks to be greater inclined to using the rise in central bank money for lending were extended for another year.  Without doing such, the facilities would have expired this March.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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