By Max Sato
(MaceNews) – The Bank of Japan said Tuesday it is maintaining its policy stance, as expected, after adding new tools and tweaking existing schemes to make its monetary easing response “more flexible and nimble” last month.
In its quarterly update on the medium-term outlook, the central bank turned more upbeat about economic growth in the next couple of years on the assumption that the drag from the global pandemic should “almost subside” in the middle of the bank’s projection period (around 2022), thanks to vaccinations.
The bank expects inflation to pick up gradually from around zero now and reach 1% in about two to three years, but that would be still only hallway toward its 2% target set in January 2013, a few months before Governor Haruhiko Kuroda took office and launched a reflationary campaign with massive asset purchases.
After its two-day meeting, the BOJ’s nine-member board decided Tuesday in an 8-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.
As expected, reflationist board member Goushi Kataoka, a former private-sector economist, continued dissenting at the meeting, arguing that it was “desirable to further strengthen monetary easing by lowering short-and long-term interest rates, with a view to responding to an increase in downward pressure on prices and encouraging firms to make active business fixed investment for the post-COVID-19 era,” 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.
Last month, the BOJ decided to make it clear that it was now allowing the 10-year yield on Japanese government bonds to fluctuate 25 basis points (0.25 percentage point) either side of the target level, which is currently around zero percent. Previously, it was believed that the bank was allowing moves of plus or minus 20 basis points around the target.
In the latest statement, which is unchanged from March, the bank said it will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) “as necessary” with upper limits of about Y12 trillion and about Y180 billion, respectively, in annual paces of increase in their amounts outstanding.
“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.
Outlook Report: GDP Rebound, Slow CPI Uptick
Despite the recent resurgence of coronavirus infections, BOJ policymakers slightly raised their growth forecast for the current fiscal year ending next March and jacked up their projection for fiscal 2022. They tweaked their inflation outlook but are basically holding onto their belief that prices will eventually move upward as the economy gradually reopens.
The BOJ repeated its recent assessment that risks to both growth and inflation are “skewed to the downside.” It said the board’s outlook is “highly unclear” due to the lingering pandemic. Three months ago, it said the outlook remained “extremely unclear.”
“Although the level of Japan’s economic activity, particularly in the face-to-face services sector, is expected to be lower than that prior to the pandemic for the time being, the economy is likely to recover, with the impact of COVID-19 waning gradually,” the BOJ said in its quarterly Outlook Report.
For fiscal 2020 that ended on March 31, the median forecast for the core consumer price index (excluding perishables) by the nine-member board was revised up slightly to -0.4% from -0.5% projected in January, according to the Outlook Report.
The median inflation forecast for fiscal 2021 was revised down to +0.1% from +0.5% made in January in light of reductions in mobile phone charges by many carriers for various plans. The forecast for fiscal 2022 was revised up to +0.8% from +0.7%.
In its first estimate, the board projected that the core CPI would rise 1.0% in fiscal 2023 ending in March 2024, which is still far below the BOJ’s 2% target.
The second five-year term of Governor Kuroda is scheduled to end on April 8, 2023.
The median economic growth forecast for fiscal 2020 was revised up to -4.9% from -5.6% projected in January. The real GDP projection for the current fiscal year was +4.0%, revised up slightly from +3.9% forecast three months ago, and that for fiscal 2022 was +2.4%, up sharply from +1.8% in the previous outlook.
In the following year, however, the BOJ board expects the economy to grow at a slower pace of 1.3% (its first estimate).
In its baseline outlook, the BOJ said, “The year-on-year rate of change in the CPI is likely to be slightly negative for the time being, mainly affected by COVID-19 and the reduction in mobile phone charges.”
It added the word ‘slightly’ as energy markets have been picking up and the downward pressure from the ‘Go To Travel’ campaign (government-sponsored hefty discounts on hotel and transport fees to support the tourism industry) has waned. In late December, the government suspended the controversial discount program in the face of surging news coronavirus cases.