By Max Sato
(MaceNews) – The Bank of Japan Friday offered an early Christmas gift by extending the period of increased financial asset purchases and special funding operations aimed at promoting more lending to cash-strapped small businesses by six months until the end of September 2021.
After a regular two-day policy meeting, the bank’s nine-member board voted unanimously to maximize the impact of its existing monetary-fiscal hybrid stimulus tools to prevent the global pandemic from hurting the fragile economic recovery and keep consumer prices sliding further.
“Japan’s economy has picked up, but the pace of improvement is expected to be only moderate while vigilance against COVID-19 continues,” the BOJ said. “In this situation, financing, mainly of firms, is likely to remain under stress for the time being.”
Depending on the future impact of COVID-19, the BOJ said, it will consider “further extension of the (fund-supplying) program if necessary.”
At the same time, the board decided in an 8-to-1 vote to maintain its easing stance under the yield curve control framework it adopted in September 2016, as expected, vowing to keep zero to negative interest rates as long as necessary to achieve its 2% inflation target in a stable manner.
Reflationist board member Goushi Kataoka, a former private-sector economist, continued dissenting, arguing that it was “desirable to further strengthen monetary easing by lowering short-and long-term interest rates,” according to the BOJ.
The BOJ also decided to maintain its policy stance to flood financial markets with cash by buying Japanese government bonds with no upper limits, the key tool of keeping the 10-year JGB yield around 0%.
“For the time being, the bank will closely monitor the impact of COVID-19 and will not hesitate to take additional easing measures if necessary, and also it expects short-and long-term policy interest rates to remain at their present or lower levels,” the bank repeated its mantra in a post-meeting statement.
The bank made a special mention to the effectiveness of its main policy framework, saying that its quantitative and qualitative monetary easing with yield curve control “has been working well to date” and thus the bank believes “there is no need to change it.”
BOJ to review its policy tools, release findings in March
However, the BOJ said it will review all of its policy measures under framework “for further effective and sustainable monetary easing” and release its findings “likely” at its next policy-setting meeting scheduled for March 18-19.
Under the framework, the BOJ has been trying to stabilize the 10-year government bond yield, the benchmark for long-term borrowing costs, at around zero percent and keep the overnight interest rate at -0.1%.
In its statement, the BOJ said the board decided to extend the duration of additional purchases of CPs and corporate bonds by six months from end-March until end-Sept 2021 to cope with growing downside risks posed by COVID-19.
The BOJ will keep the upper limit of those asset purchase at about Y20 trillion in the total outstanding amount, with Y15 trillion of the total allocate for the additional purchases. How to distribute among each asset depends on market conditions, the bank said.
The bank will also extend the term of its special COVID-19 fund-supplying operations by six months until end-Sept 2021 to help banks lend more to needy small firms. The BOJ said it would remove the upper limit of funds it provides to each eligible lender (Y100 billion) against loans that private-sector financial institutions make on their own.
Mixed economic data
Leading up to the latest policy meeting, business confidence has improved sharply while exports have taken one step back from their recent pickup trend as the global economy faces pandemic-caused uncertainty.
Japanese firms nearly across the board reported their sentiment improved substantially in December from three months earlier, thanks to the Chinese and U.S. economic recovery as well as a gradual pickup in domestic demand, according to the BOJ’s quarterly Tankan business survey released Monday.
But the survey also showed that large companies sharply revised down their plans for business investment in equipment in the current fiscal year ending next March over fiscal 2019, amid growing uncertainty over global growth as many cities around the world have been hit by renewed spikes in coronavirus infections.
The Tankan diffusion index showing sentiment among major manufacturers surged to -10 in December from -27 in September, improving for the second straight quarter. Sharp improvements were reported by automakers, lumber and wood producers, steel mills and non-ferrous metal makers.
The Tankan showed that major firms downgraded their capital investment plans to a combined decrease of 1.2% in the current 2020 fiscal year ending in March 2021 over the previous fiscal year, down from a rise of 1.4% projected three months earlier.
Japanese exports slumped 4.2% on year in November, coming in much weaker than the consensus forecast of a 0.5% increase, Ministry of Finance trade date released Wednesday showed. It was the 24th straight y/y drop after a 0.2% fall in October and double-digit percentage drops in recent months.
Economists estimate that the month-to-month change in real exports – a key indicator for the recent trend – might have posted the first month-on-month decline in six months on a seasonally adjusted basis. But the BOJ’s own real export index rose 3.7% on month in November, posting the sixth straight m/m gain after rising 4.5% in October.
At its previous meeting in October, BOJ policymakers lowered their growth forecast for the current fiscal year ending next March and revised up their projection slightly for fiscal 2021, a case of a deeper slump followed by a stronger rebound. They made slight changes to their inflation outlook but are basically keeping the line that the current price drops will be partly offset next year.
BOJ to issue medium-term outlook next month
The BOJ will release its quarterly Outlook Report after the next two-day policy meeting ending on Jan. 21. In its last report issued in October, the bank repeated its concern that risks to both growth and inflation were “skewed to the downside” and its outlook remained “extremely unclear” amid the lingering impact of the global pandemic.
The latest median forecast for the core consumer price index (excluding perishables) by the nine-member board is -0.6% for fiscal 2020. Excluding the direct impact of the sales tax hike in October 2019 (+0.5 percentage point) and free education subsidies by the government (-0.4 percentage point), the core CPI reading is projected to fall 0.7% in the current fiscal year.
The median inflation forecast for fiscal 2021 is +0.4% and the forecast for fiscal 2022 is slightly higher at +0.7%.
In the face of falling energy prices, Japan’s national average core CPI slumped 0.9% from a year earlier in November, as expected, after falling 0.7% in October, government data released Friday showed.
The key price measure is drifting further away from the BOJ’s 2% inflation target, which was adopted in January 2013 as part of the then Prime Minister Shinzo Abe’s reflationary policy mix of massive monetary easing, flexible fiscal spending and promises of deregulation.
Govt fiscal 2021 forecast in line with BOJ outlook
The government on Friday released its official economic forecast for the next fiscal year. It is projecting real GDP to grow 4.0% in fiscal 2021, partly recovering a 5.2% contraction it expects in fiscal 2020. Those figures are slightly higher than the BOJ board’s median forecast for a 3.6% rise in fiscal 2021 and a 5.5% drop in fiscal 2020.
The government’s inflation forecast is a rise of 0.4% in total CPI in fiscal 2021 after a projected 0.6% drop in the current fiscal year, in line with the BOJ board’s core CPI projections.
The BOJ largely maintained its assessment of key components of the Japanese economy.
* Exports and industrial production have continued to increase.
* Corporate profits and business sentiment deteriorated significantly but subsequently have improved gradually.
* Business fixed investment has been on a declining trend.
* With the continuing impact of COVID-19, the employment and income situation has been weak.
* Private consumption has picked up gradually on the whole, although consumption of services, such as eating and drinking as well as accommodations, has remained at a low level.
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Contact this reporter: max@macenews.com.
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