Bank of Japan Keeps Rates Policy Unchanged and Updates Forecasts

April 25, 2019

The third scheduled Japanese monetary policy review of 2019 coincided with publication of the quarterly Outlook for Economic Activity and Prices, in which the baseline projections have been updated for GDP growth and core CPI inflation (excluding fresh food and adjusted to exclude as well the effect of a 2-percentage point consumption sales tax due next October). For the first time, the macroeconomic forecast time horizon has been extended to fiscal 2021, which ends in March 2022. In the table below, the latest forecasts are compared to those assumed in the four previous Outlooks, and one sees that projected growth and inflation have been bumped lower for the current fiscal year and fiscal 2020. Not until the new outer year of fiscal 2021 does economic growth rise above 1.0%, and even then, inflation is still expected to average nearly a half-percentage point below target.

%change            FY2018                2019                  2020                 2021

GDP-APR19        0.6%                     0.8%                      0.9%                    1.2%

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-APR18          1.6%                     0.8%                     0.8%


CPI-APR19           0.8%                    0.8%                   1.3%                         1.6%

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-APR18           1.3%                     1.8%                     1.8%

The baseline forecast continues to embrace the view that moderately expanding real GDP will persist throughout the length of the forecasting time horizon. Such is to be driven mainly by consumption via a virtuous economic cycle of rising employment and income. Officials assume additional support from Olympic games-related demand. Since potential GDP is expanding no faster than 1.0%, the forecast implies a widening output gap, which ordinarily would be associated with higher inflation that Japan is experiencing. Officials acknowledge a greater disconnection between the output gap developments and the trend in inflation, which they attribute to “the experience of prolonged low growth and deflation, and firms’ cautious wage- and price-setting stance as well as households’ cautiousness toward price rises. …. It has been taking time to resolve these factors that have been delaying price rises, and the situation likely has continued in which the responsiveness of prices to the output gap, as well as inflation expectations that are strongly affected by the adaptive formation mechanism, do not rise easily.”  That being said, the Board’s 7-2 majority is sticking to the view that the current policy stance is appropriately stimulative and that it’s simply a matter of greater time before core inflation eventually levitates to and temporarily above the 2.0% target.

The formal monetary policy statement released after this week’s review keeps the short-term policy interest rate at -0.1% and the 10-year Japanese Government Bond rate goal unchanged at “around zero percent.” JGB purchases per year will continue at around 80 trillion yen. These elements of the policy stance have been already in place for the past 2-1/2 years, and today’s statement promises “to maintain the current extremely low levels of short- and long-term
interest rates for an extended period of time, at least through around spring 2020, taking
into account uncertainties regarding economic activity and prices including developments
in overseas economies and the effects of the scheduled consumption tax hike.” That’s a quarter beyond the prior indication. Also officials concede that risks are skewed to the downside regarding their baseline forecasts of both growth and inflation.

Two of the nine board members — Harada and Kataoka — continue to feel that monetary policy should be eased further. They make a good case. Projected growth and inflation have been revised lower, and core inflation over the half year between September 2018 and March 2019 was only 0.6% at a seasonally adjusted annual rate, down from 1.0% in the previous half-year period. As restated in today’s Board statement, the intent is to “continue expanding the
monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh
food) exceeds 2 percent and stays above the target in a stable manner.” There is a wide gap between the central bank’s goal and current reality, and that gap has in fact widened. Other than more emphatically worded forward guidance, the one other concrete policy change made today involves various measure to encourage bank lending, such as expanding eligible collateral for the BOJ’s provision of credit, improving and promoting the use of the Fund-Provisioning Measure, and relaxation of the terms and conditions for the Securities Lending Facility.

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



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