Bank of Japan Stays Its Course
January 23, 2018
The board of the Bank of Japan deliberated over two days for a combined four hours 35 minutes and arrived at the same decision as in December or October for that matter when the previous Outlook for Economic Activity and Prices was prepared. The vote at all three meetings was the same, 8-1, with Goushi Kataoka favoring even more stimulus than the majority.The policy stance goes by the long name of “Quantitative and Qualitative Monetary Easing with Yield Curve Control.” Officials are committed to continuing purchases of longer-dated JGBs at a pace of around 80 trillion yen a year, but the size of on-going asset buying is less central to the latest evolution of this stimulative stance than the goal of suppressing the 10-year JGB yield near 0%. Today such was at 0.06%. As announced in today’s Board statement, there will continue to be a negative interest rate of -0.1% on Policy-Rate balances that are held at the central bank for commercial banks. The limits on ETFs of 6 trillion yen and J-Reits of JPY 90 billion were not changed either, and officials extended for another year the deadlines for new applications for fund-provisioning measures to stimulate bank lending, strengthening foundations for growth, and supporting financial institutions in areas affected by big earthquakes.
The policy remains open-ended, meaning that the stimulus will be sustained for however long is necessary to achieve the goal of lifting core inflation up to the target of 2.0% in what officials deem a sustained manner. Japan’s core CPI measure excludes energy, and it’s become increasingly apparent that officials are in fact putting equal or greater emphasis on the core-core CPI, which does exclude energy as well as perishable food. As of November, the latest reported month of the national CPI index, core inflation of 0.9% was effectively halfway between zero and the target, but the core-core index was still languishing at 0.3%, far to distant from the target, according to Governor Kuroda at today’s press conference, to even begin contemplating the timing and means of an eventual exit from the current policy stance. Needing core-core to reach 2% is another way of saying, as the BOJ had done in the past, that core CPI likely will need to exceed the 2.0% target temporarily at some point in order for expected long-term inflation in the market to rise to the target and thus validate the credibility of the central bank’s pledge not to quit its quest for 2% inflation until the mission is fully accomplished.
A new quarterly Outlook for Economic Activity and Prices was published today. Somewhat surprisingly, projected GDP growth was not revised upward. As one sees in the table below, the estimates for this and the next two fiscal years (April-March) are identical to those postulated three months ago when the October Outlook was published. The slowdown in fiscal 2019 reflects a planned 2 percentage point increase in the national sales tax due in October 2019, which will exert a 1 percentage point drag on annualized growth. Half of fiscal 2019 lies after that increase goes into effect. Growth risks around the forecast are considered to be roughly balanced.
| GDP, %
January ’18 October July April January ’17 October ’16 |
Fiscal 2017
1.9% 1.9% 1.8% 1.6% 1.5% 1.3% |
Fiscal 2018
1.4% 1.4% 1.4% 1.3% 1.1% 0.9% |
Fiscal 2019
0.7% 0.7% 0.7% 0.7%
|
| Core CPI
January ’18 October July April January ’17 October ’16 |
Fiscal 2017
0.8% 0.8% 1.1% 1.4% 1.5% 1.5% |
Fiscal 2018
1.4% 1.4% 1.5% 1.7% 1.7% 1.7% |
Fiscal 2019
1.8% 1.8% 1.8% 1.9% |
Meanwhile, the central bank’s inflation forecasts also matched those made back in October, but here risks remain skewed somewhat to the downside. The baseline forecast sees inflation eventually bubbling up toward 2%. Japan’s measured output gap (the difference between actual GDP and potential supply side-determined non-inflationary GDP) as positive, and actual GDP next fiscal year is projected to grow faster than the assumed potential GDP growth rate of between 0.5% and 1.0%. If expected inflation were consistent with the BOJ’s target, the positive and still-swelling output gap would imply rising inflation, and officials are assuming that the tenacity of monetary stimulus even as the labor and product markets tighten will in time nudge expected inflation toward their target. But they previously had predicted that such would already have happened. It hasn’t, and that failure justifies retaining the view that price risks are skewed to the downside.
All this underscores why the majority of board members believe there is no way that they can start talking about a policy exit strategy before the goal is close at hand. Were they to do so, expected inflation could suffer a setback, and the objective might slip away from their grasp. An unspoken intermediate goal of monetary policy is a cheap yen, since a rising currency value would depress import prices. But that collides with U.S. President Trump’s desire for a weak dollar and more balanced U.S. bilateral balances with countries like Japan that have a big surplus. Today the yen advanced.
Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of Japan
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