Bank of Japan Left Policy Settings Unchanged But Cut Growth and Inflation Forecasts

July 15, 2015

There’s been another 8-1 Board decision to continue the open-ended quantitative and qualitative monetary stimulus, buying JPY 80 trillion of long-dated JGBs per year until 2.0% core inflation is secured and deemed maintainable.  The decision was as expected.  Policy stimulus is not expected to be augmented before October, if then.  That will be the occasion of the next quarterly forecast update.  A released statement today slightly downgrades the view of exports and industrial production but keeps unchanged the overall assessment of a moderately paced recovery that’s likely to continue.

New quarterly price and growth forecasts were approved at this meeting.  Growth in the current fiscal year through March 2016 was revised downward by 0.3 percentage points to 1.7%.  The fiscal year got off to a bad start, with likely GDP growth hovering at best around zero and perhaps slipping into the red.  Projected growth in fiscal 2016 of 1.5% and in fiscal 2017 of just 0.2% were unchanged from estimates posited in April.  The table below shows the evolution of projected fiscal 2015 and fiscal 2016 growth at sequential outlook reviews publicized in July 2014, October 2014, January 2015, April 2015 and now.

Real GDP Growth Fiscal 2015-f Fiscal 2016-f
July 2014 1.5% 1.3%
October 2014 1.5% 1.2%
January 2015 2.1% 1.6%
April 2015 2.0% 1.5%
July 2015 1.5% 1.5%


The current round of quantitative stimulus was launched in April 2013 and involved JGB purchases of JPY 50 trillion per year in order to grow the monetary base at an annual rate of 60-70 trillion yen.  Since end-October 2014, those targeted amounts have each been JPY 80 trillion a year, but the program was undermined by a consumption tax hike last year and has failed to secure as much growth as hoped.

The 2.0% target on core inflation has likewise remained elusive.  Initially, the Board thought the mission would be accomplished by April 2015 but pushed that out a year further.  Core inflation rose just 0.1% in between May 2014 and May 2015.  Notably core inflation in fiscal 2016, which had been projected at 2.0% in April, was revised in this review to 1.9%, and the forecast for fiscal 2017 is also 1.9% when the impact from a planned sales tax hike in April 2017 is excluded.  The evolution of the core CPI forecasts endorsed by the Board is shown below.  Lower-than-assumed inflation has been blamed largely on the plunge in oil prices.  An additional factor that impacted the forecasts was decision to move a consumption tax hike planned originally for October 2015 to April 2017 instead in order to give the economy to rebuild upward momentum after the shock of the last tax hike in April 2014.

Core CPI Fiscal 2015-f Fiscal 2016-f
July 2014 2.6% 2.8%
October 2014 2.4% 2.8%
January 2015 1.0% 2.2%
April 2015 0.8% 2.0%
July 2015 0.7% 1.9%


The credibility of Abenomics has suffered from missed forecasts.  Indeed, the further loosening of monetary policy, voted by a thin 5-4 margin last October, was justified as a pre-emptive move against the risk of expected inflation being depressed by lower actual inflation.  So far, Governor Kuroda reports that the Bank’s measures of expected inflation in the medium term don’t show that happening, but there has been some downward movement on expected inflation in the nearer term.  Kuroda’s confidence in faster growth this quarter, an upturn of inflation by 4Q15, and near-2% core CPI by 3Q17 isn’t matched by private sector analysts or the IMF.

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



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