–Central Bank Still Sees Under 1% Inflation in 2 Years, Well Below 2% Target
By Max Sato
(MaceNews) – The Bank of Japan has maintained its policy stance, as expected, after extending the period of special easing tools last month amid growing downside risks, while continuing to forecast that the domestic economy will recover part of the pandemic-triggered contraction in the next fiscal year and prices will crawl out of the current drops and edge toward 1% in about two years.
The BOJ’s nine-member board decided Thursday in a 7-to-1 vote to maintain its current monetary easing stance under the yield curve control framework it adopted in September 2016, vowing to keep zero to negative interest rates as long as necessary to achieve its 2% inflation target in a stable manner.
Both no change in policy and minor updates to official economic projections were widely expected at the bank’s latest two-day policy meeting. The focus is on the next meeting, on March 18-19, when the board is scheduled to review all of its policy measures “for further effective and sustainable monetary easing.”
No major policy framework revamp is expected. As noted in the bank’s December statement, 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.”
As expected, reflationist board member Goushi Kataoka, a former private-sector economist, continued dissenting at the latest meeting, arguing that it was “desirable to further strengthen monetary easing by lowering short-and long-term interest rates,” according to the BOJ.
Unexpected was the absence of Deputy Governor Masayoshi Amamiya from the policy meeting. He has been behind what was once known as “unconventional” monetary easing ranging from massive asset purchases to controlling long-term interest rates, all aimed at guiding people out of the deflationary mindset and promoting more bank lending to growth areas.
Amamiya stayed home on Thursday “as a precaution” because a family member was taking a COVID-19 test, a BOJ spokesman said, adding there are no health issues with the career central banker.
It is the first time that a board member has skipped a policy-setting meeting during the pandemic. The last time a policy board member was absent was in November 2011, when Ryuzo Miyao, a former economics professor, missed an emergency evening meeting, according to the BOJ.
Under the current 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 through large-scale purchases of Japanese government bonds without setting an upper limit, and to keep the overnight interest rate at -0.1% by charging 0.1% interest on a part of cash reserves parked at the bank by financial institutions.
“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. There is no indication at this point that the bank is considering to take more easing actions.
The board decided, by a unanimous vote, to extend by one year the deadlines for loan disbursements under the Fund-Provisioning Measure to Stimulate Bank Lending and the Fund-Provisioning Measure to Support Strengthening the Foundations for Economic Growth, the BOJ said.
Amid a third wave of pandemic casualties and surging new cases in many cities and countries, BOJ policymakers slightly lowered their growth forecast for the current fiscal year ending next March and revised up their projection, also slightly, for fiscal 2021 and 2022. They tweaked their inflation outlook but are basically keeping the line that the current price drops should be offset next year.
The board’s revision to its medium-term inflation projection was limited. It repeated its recent assessment that risks to both growth and inflation are “skewed to the downside” and its outlook remains “extremely unclear” amid fears of variants of the deadly virus causing more casualties and hopes for speedy inoculation.
In the bank’s quarterly Outlook Report, the median forecast for the core consumer price index (excluding perishables) by the nine-member board was revised up slightly to -0.5% for fiscal 2020 from -0.6% projected in October.
Excluding the direct impact of a sales tax hike to 10% from 8% that took effect in October 2019 (+0.5 percentage point) and free education subsided by the government (-0.4 percentage point), the core CPI reading is projected to fall 0.6% in the current fiscal year, revised up from -0.7% forecast in October.
The median inflation forecast for fiscal 2021 was revised up slightly to +0.5% from +0.4% made in October and that for fiscal 2022 was unchanged at +0.7%.
The median economic growth forecast for the current fiscal year was revised down slightly to -5.6% from -5.5% projected in October. The real GDP projection for the next fiscal year was +3.9%, revised up from +3.6% forecast three months ago, and that for fiscal 2022 was +1.8% vs. +1.6% in the previous outlook.
In its baseline outlook, the BOJ said, “The year-on-year rate of change in the CPI is likely to be negative for the time being, mainly affected by COVID-19, the past decline in crude oil prices, and the ‘Go To Travel’ campaign (government-sponsored hefty discounts on hotel and transport fees launched in July to support the tourism industry).”
The government has suspended the discount program in the face of surging news coronavirus cases.
The BOJ made minor changes to its assessment of key components of the Japanese economy in the Outlook Report.
- Exports and industrial production have continued to increase (unchanged from the previous statement issued after the Dec. 17-18 meeting).
- Business fixed investment has stopped declining on the whole, albeit variations across industries (upgraded from “has been on a declining trend”).
- With the continuing impact of COVID-19, the employment and income situation has remained weak (vs. “has been weak”).
- Private consumption has picked up gradually as a trend, but downside pressure has increased recently on consumption of services, such as eating and drinking as well as accommodations (vs. “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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