Bank of Japan

April 27, 2018

After a two-day discussion lasting four hours 17 minutes, members of the Bank of Japan left their settings on their QQE policy with Yield Curve Control unchanged.

  • A -0.10% short-term Policy Rate on current account balances of financial institutions held with it.
  • Annual purchases of JGBs totaling about 80 trillion yen. The amount has recently been running below this pace.
  • A target of around zero percent on the 10-year JGB yield, enforced via bond purchases.
  • Purchases of some JPY 6 trillion of ETFs and JPY 90 billion of J-REITS per year.
  • A pledge to maintain this stimulative stance for as long as needed until 2% inflation is achieved and they feel confident that it will be sustained in a stable manner.
  • The realization that core inflation will need to go above 2% for a while to ensure that 2% is achieved stably.

This policy meeting marked the beginning of Governor Kuroda’s second five-year term. The Bank of Japan has two new deputy governors, Amamiya and Wakatabe, who both supported the majority 8-1 decision. Kataoka, one of six holdover other Board members, again cast a dissenting vote in favor of an even more stimulative policy stance.

To mark the start of Kuroda’s second stint as governor, the Board dropped a key element of QQE, namely forward guidance on the date when officials expect 2% core CPI to be restored. Initially in 2013, that time was put at April 2015. After repeatedly modifying that forecast to deeper into the future, officials decided to no longer make such a forecast that they clearly can’t meet. But otherwise, both the policy statement and a new quarterly Outlook for Economic Activity and Prices retain the same optimism shown at previous Board meetings. Officials believe that Japan’s economy will continue to expand at a moderate pace, that such will cause the output gap, which already is positive, to become more so, and that core inflation will eventually rise and reach the desired target. The Outlook does concede that price risks are still skewed to the downside, and even for fiscal 2020, there is a baseline core inflation forecast below 2.0%, once one adjusts for a planned consumption tax hike in October 2019.

Economic forecasts for fiscal 2018 and fiscal 2019 are barely changed from one’s made three months ago. GDP is still projected to rise 1.6% this fiscal year, followed by 0.8% in fiscal 2019, revised from 0.7%. Growth next fiscal year and in FY20, which is penciled in at 0.8% as well, will be dampened by the consumption tax hike and, late in the period, the Olympics spending hangover. Officials assume that potential GDP, which is determined by supply-side factors, will climb between 0.5% and 1.0% throughout the forecast time horizon.

Projected core CPI inflation this fiscal year was bumped down to 1.3% from 1.4%. For  fiscal 2019, core CPI is projected at 1.8% just as it was in the three previous quarterly Outlooks. Officials are also predicting 1.8% core inflation in fiscal 2020. These estimates filter out the boost from the aforementioned consumption tax hike, which is expected to amount to 0.5% in both fiscal 2019 and fiscal 2020.

Although the written documents released today delete any mention of a date when the inflation target is likely to be met, Governor Kuroda at the subsequent press conference thought that 2% sometime in fiscal 2019 is possible.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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