Bank of Japan

October 31, 2018

A statement released by the Bank of Japan Board after this week’s four hour 11 minute monetary policy review left all settings of the policy known as Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control unchanged. Similar to other recent meetings, the decision was taken by a 7-2 vote, with dissents from Yutaka Harada and Gaoshi Kataoka favoring even more stimulus. Forward guidance was also kept the same. Officials promise to “continue expanding the monetary base until the year-on-year rate of increase in the observed consumer price index (CPI, all items less fresh food) exceeds 2 percent and stays above the target in a stable manner. As for policy rates, 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 Board’s economic Outlook remains essentially the same in a qualitative sense but acknowledges that growth this year will be marginally less than forecast previously and, more significantly, that the likely projected core inflation path this year and in 2019 and 2020 will be lower than imagined previously. The latest macroeconomic forecasts are compared below to those presented in the previous two Outlooks for Economic Activity and Prices. Note 1) that years correspond to April-March fiscal years; 2) officials are projecting core CPI, not total CPI, and 3) fiscal 2019 and fiscal 2020 core inflation projections exclude, in addition to fresh food, the effects of a planned 2 percentage point consumption tax hike due October 2019.

%change               2018                     2019                     2020

GDP-OCT             1.4%                     0.8%                     0.8%

GDP-JUL              1.5%                     0.8%                     0.8%

GDP-APR              1.6%                     0.8%                     0.8%


CPI-OCT               0.9%                     1.4%                     1.5%

CPI-JUL                1.1%                     1.5%                     1.6%

CPI-APR                1.3%                     1.8%                     1.8%

The BOJ’s never-dying confidence that all they need is more time to achieve the ever-elusive 2.0% inflation goal is based on the belief that Japan has a positive output gap that continues to widen as GDP expands faster than supply-constrained potential GDP. But the big surprise has been the comparatively weak influence of the output gap in shaping expectations of future inflation and actual wage-setting and price-setting behavior. The Board’s latest Outlook does concede that both growth and price risks to the baseline forecast are tilted to the downside, and two risks are particularly illuminated: one being the effect of the consumption tax on growth and the other being pressures from mounting global protectionism particularly between the U.S. and China.

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



Comments are closed.