Bank of Japan Hunkering Down and Putting Up an Optimistic Front

March 17, 2015

What stands out about today’s central bank statement is not what changed but how much was kept the same.  The March Policy Board meeting did not adjust its stance and released an identical statement to the month before with the one notable exception of a downward revision of core inflation.  The meeting lasted five hours fifteen minutes, thirteen minutes longer than the one in February.  February’s also had changed projected inflation, claiming that such to be “around 0.5%” rather than 0.5-1.0% as asserted in January, and today’s statement cut such to 0.0%.  In a subsequent press conference, Governor Kuroda didn’t rule out some readings below zero in the near term.  But the undershoot was attributed entirely to the unexpected plunge of oil prices, which are assumed to stabilize and then firm even though fresh lows for the move were hit today. 

A separate suspect assumption in today’s released statement was leaving the forecast for growth and each component of demand exactly as before.  Not only did growth last quarter get estimated initially at a much weaker-than-forecast 2.2%, but it subsequently got revised downward to 1.5%, a very weak recovery from dives of 6.4% in the second quarter and 2.6% in the third quarter.  Japan’s manufacturing and service-industry purchasing managers surveys each deteriorated between January and February.  Real household spending fell 0.4% on month in January.  Small business sentiment in January-February of 46.4 on average was 0.8 points further below 50 than the November-December mean.  On-year growth in bank lending of 2.5% and M2 money of 3.5% in February remain essentially unresponsive to the stimulus of monetary policy.  The only compelling source promoting growth is yen depreciation, but that’s a self-limiting factor and therefore unlikely to lift medium-term expected inflation in a sustaining way. 

The Policy Board’s message of hope boils down to an appeal for trust that its optimism about raising inflation to 2% by the spring of 2016.  In the beginning, the timetable envisaged the mission getting accomplished by the spring of 2015, that is now.  Instead, core inflation is all of 0.2%, and without a greater than 35% slide in the yen against the dollar since the autumn of 2012, inflation now would be substantially under zero.  Part of the message is that officials are constantly verifying their view by monitoring such economic indicators as wages, oil prices, and various measures of expected inflation, and that they are ready to act if empirical evidence deviates from their baseline scenario in a substantial way.  Over the past 23-1/2 months, the stance was tweaked just once and then by a 5-4 vote.  One Board member, Takahide Kiuchi, continues to dissent at each Board meeting, declaring that augmenting stimulus at the October 2014 meeting to have been a mistake, compounding the error of placing no specified time limit on how long quantitative easing is to be done and a virtual zero interest rate policy kept.  The Bank of Japan, like the German Bundesbank which has great influence over ECB actions, remains a deeply conservative institution, guarding against the next inflation when deflation is the clearer and more present danger.

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



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