–BOJ Vows to Keep Monetary Support Until 2% Inflation Achieved
–Japan Economy Likely to Recover Despite Surging Commodities Prices
–‘Extremely High Uncertainties’ Over Ukraine Impact on Japan Via Prices, Markets, Global Demand
By Max Sato
The BOJ is keeping its stance of flexibly buying large amounts of Japanese government bonds, which is directly linked to its key policy tool of controlling long-term borrowing costs for businesses and households.
It is also maintaining the pace of its purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs), which have supported domestic stock markets, and thus economic sentiment.
To Gradually Lower CP, Corporate Bond Purchases
On the other hand, as the economy is weathering the Covid drag, the bank decided that from April onward, it will lower its holdings of commercial paper and corporate bonds so that their amounts outstanding will “gradually” return to pre-pandemic levels of about Y2 trillion for CP and about Y3 trillion yen for corporate bonds.
As planned, it will continue buying these assets with an upper limit on the amount outstanding of about Y20 trillion in total until the end of March 2022.
The BOJ made no changes to its programs to support firms hit by the pandemic, as expected. The bank already decided in December to end parts of its anti-Covid special financing program aimed at supporting large firms, whose financial conditions have improved, at the end of March 2022, as scheduled, while extending its feature of helping hard-hit small businesses, particularly those in the service sector, for six months until the end of September.
Japan Economy To Recover Despite Headwinds
The BOJ revised down its view slightly to say Japan’s economy “has picked up as a trend” with some weakness caused by Covid-19, a change from language in its January Outlook Report when it had said, “A pick-up in Japan’s economy has become evident as the impact of Covid-19 at home and abroad has waned gradually.”
It did note, however, that in the wake of Russia’s invasion of Ukraine, global financial and capital markets have been “volatile” and prices of crude oil and other commodities have risen “significantly,” thus that “future developments warrant attention.”
The BOJ remains confident about recovery from the pandemic-caused slowdown,
largely repeating its assessment from its quarterly Outlook Report issued on Jan. 18.
“Japan’s economy, although expected to be affected by a rise in commodity prices, is likely to recover, with downward pressure stemming from Covid-19 on services consumption and the effects of supply-side constraints waning and with support from an increase in external demand, accommodative financial conditions, and the government’s economic measures,” it said.
‘Extremely High Uncertainties’ Over Ukraine Factors
On risk factors, in addition to the lingering effects of the pandemic, the BOJ warned that “there are extremely high uncertainties over how the situation surrounding Ukraine will affect Japan’s economic activity and prices, mainly through developments in global financial and capital markets, commodity prices, and overseas economies.”
Regarding the Russia-Ukraine conflict, the International Monetary Fund on Tuesday warned that “the war and resulting jump in costs for essential commodities will make it harder for policymakers in some countries to strike the delicate balance between containing inflation and supporting the economic recovery from the pandemic.”
On the impact on Asia, the IMF said, “Spillovers from Russia are likely limited given the lack of close economic ties, but slower growth in Europe and the global economy will take a heavy toll on major exporters.”
The BOJ is maintaining its view of a gradual pickup in consumer inflation, saying that “inflation expectations have risen moderately.”
It noted that the year-on-year increase in the core consumer price index (excluding fresh food) has been at around 0.5% despite the downward pressure from government-led sharp discounts in mobile phone charges and reflecting
price rises of energy and other items.
Looking ahead, the BOJ forecast that the year-on-year rise in the core CPI is “likely to increase clearly in positive territory for the time being” due to a significant rise in energy prices, a pass-through of raw material cost increases, and dissipation of the effects of the reduction in mobile phone charges.
“The underlying inflationary pressure is projected to increase, mainly on the back of improvement in the output gap and a rise in medium- to long-term inflation expectations,” it said.
Key Easing Policy Stance Unchanged
Under the current framework, the BOJ is keeping the 10-year government bond yield, the benchmark for long-term borrowing costs, at around zero percent by buying “a necessary amount” 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 said, repeating its recent statement.
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, with a view to encouraging firms to make active business fixed investment for the post Covid-19 era,” according to the BOJ.
The BOJ board decided unanimously to leave the main asset purchase guidelines unchanged.
“The bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) as necessary with upper limits of about 12 trillion yen and about 180 billion yen, respectively, on annual paces of increase in their amounts outstanding,” the BOJ said.