Bank of Japan

July 31, 2018

The Bank of Japan did not change its policy interest rates of negative 0.1% on overnight Policy-Rate balances or about zero percent on the 10-year JGBs. In controlling the yield curve, officials still expect to purchase about 80 trillion yen of JGBs per year, and the quantitative settings for purchases and/or holdings of ETFs, J-Reits, commercial paper, and corporate bonds were not changed, either.

The main thrust of this month’s policy review was to refortify the credibility of the BOJ monetary policy framework. Repeatedly, officials have failed to secure sustained 2% core inflation by a projected time, and investors were doubting that an ultra-loose quantitative stance could be maintained as the technical negatives felt by Japan’s financial markets kept mounting.

In a released statement, the BOJ Board reaffirms its determination to stay the course until the inflation target is met, however long that might be. By the same token, new forward guidance was added that creates a plus-or-minus 0.1% band around the long-term interest rate goal, again pushes out the likely achievement of 2% inflation further into the future, and embodies some other tweaks to make implementation of policy more workable.

The Bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, taking into account uncertainties regarding economic activity and prices including the effects of the consumption tax hike scheduled
to take place in October 2019. the yields may move upward
and downward to some extent mainly depending on developments in economic activity and prices. In case of a rapid increase in the yields, the Bank will purchase JGBs promptly and appropriately.

Officials stuck to the view that Japan’s economy is expanding moderately but that it may take some time before 2% inflation can be secured in spite of the positive output gap that continues. Projected fiscal 2018 GDP growth was revised 0.1 percentage point lower to 1.5%, and growth is expected to be less than 1% per annum in the ensuing two fiscal years because of a scheduled consumption tax hike. Growth risks in the forecast are considered balanced.

Core inflation this fiscal year also was revised downward. It is 1.1% versus 1.3% forecast last April. More significantly, projected core inflation in fiscal 2019 and fiscal 2020 was revised down as well to 1.5% and 1.6%, underscoring that the inflation target is a long-term rather than short-term project. Inflation risks are skewed downward.

Today’s meeting was accompanied by the release of a new quarterly outlook for economic growth and prices.

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



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