Enhancement Approved of Bank of Japan Monetary Easing

April 27, 2020

Normally a 2-day deliberation, the BOJ Board’s meeting was completed in a single 3-hour 1-minute session. The eye-catching change at this month’s policy review was the shift to unlimited JGB purchases in order to ensure against any unforeseen rise of the 10-year yield above the target of around zero percent. Such a change had been done previously by the Fed and ECB, whose policymakers meet later this week.  BOJ officials also sharply increased the limits on the central banks purchases of of corporate bonds, commercial paper, J-REITs and EFTs, and the terms regarding Special Funds-Supplying operations to counteract the effects of the Covid-19 pandemic, which had been introduced after the Board’s meeting in March, were strengthened.

This month’s BOJ Board meeting coincided with publication of a new quarter Outlook for Economic Activity and Prices. A bleak near-term picture is painted for the economy, but officials adhere to the view that as the pandemic loses steam in the second half of the year, more normal conditions will return in a gradual and haltingly fashion.

Exports and industrial production have declined. Business sentiment has deteriorated, and the deceleration in the pace of increase in business fixed investment has become evident recently. With the growing impact of the spread of COVID-19, the employment and income situation has started to show some weakness, and private consumption has decreased significantly, mainly in services such as eating and drinking as well as accommodations. Meanwhile, housing investment has been more or less flat and public investment has increased moderately. Financial conditions have been accommodative on the whole but less so in terms of corporate financing, as seen in deterioration in firms’ financial positions. The year-on-year rate of change in the CPI has been positive but is likely to be somewhat weak for the time being, mainly affected by the spread of COVID-19 and the decline in crude oil prices. Risks to both economic activity and prices are skewed to the downside.

The BOJ’s baseline macroeconomic forecasts were revised down sharply. Projected real GDP is expected to contract 3-5% this fiscal year ending March 31, 2021 instead of growing 0.8-1.1% as postulated in January’s Outlook.  A 0.3-0.7% drop in core CPI is now anticipated this financial year followed by a tepid flat to 0.4% rise in fiscal 2021. Finally, the Board pledges to continue with its policy of quantitative and qualitative monetary easing with yield control and “will 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.” The policy vote was 8-1 with Kataoka dissenting in favor of lowering both the -0.1% and zero percent short- and long-term interest rate targets.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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