Bank of Japan Made No Policy Change

November 1, 2016

The Bank of Japan released a statement that did not modify any element of the current policy stance. Although not an entire surprise, some speculation prior to the meeting that officials might increase some components of its asset purchase program or perhaps modify certain terms like the maturity limit on what it will purchase. Likewise, some had wondered whether the short-term interest rate might be cut marginally. Japan’s economy has been lackluster. Core inflation is at negative 0.5%. The latest diffusion indices for consumer confidence, the economy watchers index, and small business sentiment all lie below the 50 threshold. Recent data for industrial production, household spending and retail sales in September were lackluster. Core machinery orders fell 2.2% in August, and foreign machinery order in July/August was 7.5% below the 2Q mean. Exports and imports posted September-over-September declines of 6.9% and 16.3%, respectively. Donald Trump aims to make Japan pay for its defense. There are other uncertainties that are regrettably buoying the yen, which is seen as a safe haven.

The Bank of Japan also released an updated Outlook for Economic Activity and PricesLanguage describing growth conditions and prospects is virtually a verbatim reiteration of the prior statement in September. However, the upward return of inflation to target will be flatter and longer.

On the price front, the year-on-year rate of change in the CPI (all items less fresh food, and the same hereafter) has been slightly negative. Inflation expectations have remained in a weakening phase…. Comparing the current projections with the previous ones, the projected rate of increase in the CPI is somewhat lower, mainly due to medium- to long-term inflation expectations having remained in a weakening phase. The timing of the year-on-year rate of change in the CPI reaching around 2 percent will likely be at the end of the projection period — that is, around fiscal 2018.

Fiscal 2018 begins with the arrival of Governor Kuroda’s successor and end in March 2019. The numerical forecast for core inflation in the current fiscal year that runs through March is -0.1%, down from +0.1% projected this past July, a forecast of 0.5% made last April, 0.8% last January and 1.4% predicted in October 2015. Officials reduced forecast core inflation in fiscal 2015 to 1.5% from 1.7% in their Outlook released back in July. Even in fiscal 2018, inflation is projected at 1.8%, below the medium-term target of 2.0% and lagging even further behind the intention to drive inflation above 2.0% before quantitative stimulus is ended.

Copyright 2016, Larry Greenberg.  All rights reserved. No secondary distribution without express permission.




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