Bank of Japan Board Cuts Projected Inflation but Leaves Monetary Stance Unchanged

January 23, 2019

This week’s two-day BOJ Board meeting ending today coincided with the publication of a new quarterly Outlook for Economic Activity and Prices. These reports convey changes in projected GDP growth and core CPI inflation, which excludes perishable foods. The table below compares the latest forecasts identified in rows labeled GDP-JAN with earlier ones made in April, July and October of last year. The forecasts cover fiscal years (April-March), not calendar years. Just over two months remain in fiscal 2018, and central bank officials now expect real growth this fiscal year to be a half percentage point less than the previous estimate made in October. And for a fourth straight time, projected core inflation this fiscal year was also lowered. Also, despite bumping up projected growth in each of the next two fiscal years by a marginal amount, projected core inflation in fiscal 2019 has been slashed by a half percentage point to 0.9%, and projected core CPI in FY20 also was lowered a tiny bit.

%change               2018                  2019                  2020

GDP-JAN             0.9%                    0.9%                      1.0%

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-JAN               0.8%                     0.9%                   1.4%

CPI-OCT               0.9%                     1.4%                    1.5%

CPI-JUL                1.1%                     1.5%                     1.6%

CPI-APR                1.3%                     1.8%                     1.8%

Officials ascribe the lower inflation path to an assumed lower level of global energy prices, but they also concede that the dynamic between a positive output gap and higher inflation continues to kick in very slowly. The logic here has an element of Catch-22. Expected inflation is very sensitive to actual inflation. Quantitative monetary stimulus was introduced in April 2013 with an initial 2-year timetable to restore core inflation to 2.0%. The fact that inflation is still well shy of the goal is preventing expected inflation from responding as sensitively as it ordinarily would to continuing moderate economic growth with a tightening labor market. But policy easing has been enhanced very infrequently during the past six years especially amid signs such as a falling unemployment rate that the labor market keeps tightening and presence of positive growth. It is the hope of officials that eventually positive growth  while economic demand exceeds productive supply will enable inflation to exceed 2.0%. But amid mounting signs that negative interest rates are hurting banking institutions, wage setters and price setters are assuming that the central bank will not have the resolve to maintain its ultra-loose policy framework indefinitely.

Today’s policy statement kept the status quo. After meeting for 4-1/4 hours, both the elements of the policy and the voting patterns of each individual committee member remained the same. The short-term policy rate was kept at negative 0.1%, with two dissenters (Harada and Kataoka) preferring a more stimulative posture. The zero percent target, give or take 0.2 percentage point, on the 10-year Japanese Government Bond yield, introduced way back in September 2016, wasn’t adjusted, either, nor were the policy magnitudes regarding holdings of ETFs, J-REITs, corporate bonds, or commercial paper.  The long-term interest rate is being maintained via JGB purchases amounting to about 80 trillion yen per year.

The statement insists that overall policy, known at Quantitative and Qualitative Easing with Yield Curve control will be continued until core inflation exceeds 2% in a stable manner. But with core CPI falling to 0.7% in December from 1.0% two months earlier and with real GDP contracting 2.5% at an annualized rate last summer and being unchanged from its year-earlier level, the “waiting for Godot” approach of the BOJ Board is in danger of losing even more credibility.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.




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