–BOJ Repeats: To Patiently Continue with Easing while Nimbly Responding to Developments in Economic Activity, Prices, Financial Conditions
By Max Sato
(MaceNews) – The Bank of Japan said Friday its policy board decided unanimously to maintain its monetary easing stance, keeping its zero to slightly negative interest rate targets along the yield curve as well as large asset purchases to continue seeking stable 2% inflation and support sustainable wage growth.
But at the same time, the board decided in an eight to one vote to make the bank’s existing reference range for the 10-year bond yield more flexible, basically keeping the range of minus 0.5% to plus 0.5%, but expanded its ultimate defense lines to minus 1.0% and plus 1.0% in market operations.
By providing “greater flexibility,” the bank hopes to allow a natural uptick in long-term interest rates that reflects economic recovery with substantial wage hikes and mitigate the negative impact of artificially suppressing interest rates, which has paralyzed bond market functions and could negatively affect other financial markets.
Board member Toyoaki Nakamura, a former Hitachi executive with finance and accounting experience, dissented, arguing that it would be better to confirm that firms’ earning power is rising in data, such as the Ministry of Finance’s quarterly business survey, before allowing “greater flexibility” in the conduct of the bank’s yield curve control.
The bank basically repeated its April outlook that the domestic economy should recover moderately and that inflation is expected to ease to below 2% in fiscal 2024 and 2025 while revising up its forecast for fiscal 2023 ending next March to 2.5% amid continued markups in food and durable goods, although that would be still below 3% seen in fiscal 2022.
“With extremely high uncertainties surrounding economies and financial markets at home and abroad, the bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions,” the bank said, keeping the official line first issued in April and repeated in June.
“By doing so, it will aim to achieve the price stability target of 2% in a sustainable and stable manner, accompanied by wage increases.”
The statement indicates that the bank could adjust its yield curve control framework to allow slightly higher interest rates in a gradual shift toward an eventual exit from a decade of large-scale monetary easing.
In April, the bank said the board would spend the next 12 to 18 months, conducting a “broad-perspective review” of the costs and benefits of the bank’s various monetary easing measures implemented in the past 25 years. Achieving price stability “has been a challenge” since late 1990s when Japan plunged into deflation, it said in April.
The two-day policy meeting that ended Friday was the third one under Governor Kazuo Ueda, who took office on April 9. Ueda has said it is likely to take some time before the 2% inflation target is achieved and that the cost of letting inflation exceed the target is no so large as the cost of tightening too early.
BOJ Keeps Interest Rate Targets, Asset Purchases
In principle, the BOJ board maintained its decision made in December to allow the yield on the 10-year Japanese government bonds to rise to 0.5% from the previous cap of 0.25%, which was originally designed to meet upward pressures arising from last year’s aggressive tightening by other major central banks.
But now it calls the upper and lower bounds of the range “references” and regards them as “not rigid limits.”
It is also stretching the ultimate range, by stating, “The bank will offer to buy 10-year Japanese government bonds at 1.0% every business day through fixed rate purchase operations unless it is highly likely that no bids will be submitted.” Previously, the bank was offering to buy long-term bonds at a fixed rate of 0.5%
The board decided to introduce this new type of fixed-rate market operation in April 2022.
“In order to encourage the formation of a yield curve that is consistent with the above guideline for market operations, the bank will continue with large-scale JGB purchases and make nimble responses for each maturity by, for example, increasing the amount of JGB purchases and conducting fixed-rate purchase operations and the funds-supplying operations against pooled collateral,” the bank said.
BOJ Continues to See Modest Economic Recovery
“Japan’s economy is likely to continue recovering moderately for the time beingsupported by factors such as the materialization of pent-up demand, although it is expected to be under downward pressure stemming from a slowdown in the pace of recovery in overseas economies,” the bank said in its quarterly Outlook Report for July. It removed the reference to downward pressure from past rises in commodities prices as they have already eased.
“Thereafter, as a virtuous cycle from income to spending gradually intensifies, Japan’s economy is projected to continue growing at a pace above its potential growth rate,” which is estimated to be zero to 0.5%, the bank said, repeating its April projection.
The BOJ largely maintained its inflation outlook that the year-over-year rate of increase in the core consumer price index (excluding fresh food) is likely to decelerate, with a waning of the effects of a pass-through to consumer prices of cost increases led by the past rise in import prices.
“Thereafter, the rate of increase is projected to accelerate again moderately as the output gap improves and as medium- to long-term inflation expectations and wage growth rise, accompanied by changes in factors such as firms’ price- and wage-setting behavior,” the bank, more or less repeating the April report.
BOJ Still Sees ‘Extremely High Uncertainties’
Looking ahead, the bank noted that “there are extremely high uncertainties for Japan’s economy” including developments in overseas economic activities and prices, commodity prices as well as domestic firms’ wage- and price-setting behavior. It removed the Ukraine war from the list of risks but added the part about wages and pricing.
“Under these circumstances, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices,” the BOJ said, repeating its recent April report. The yen remains relatively weak as the U.S. Federal Reserve has been fighting inflation with rate hikes while the BOJ has maintained monetary easing.
Board Expects Core CPI Easing to Below 2% in Fiscal 2024, 2025
In the July Outlook Report, the BOJ board revised up its forecast for inflation for the current fiscal year further while foreseeing consumer prices will rise about 2% in fiscal 2024 but fail to be anchored at around the bank’s elusive 2% target in a sustainable manner in fiscal 2025.
“With regard to the risk balance, risks to economic activity are skewed to the downside for fiscal 2023 but are generally balanced thereafter,” the bank said, repeating its analysis provided in April.
For fiscal 2023 ending in March 2024, the median forecast for the year-on-year increase in the core consumer price index (excluding fresh food) is 2.5%, up from 1.8% forecast in April and 1.6% in January. It will be lower than the 3.0% spike seen in fiscal 2022 but much higher than the 0.1% rise in fiscal 2021 the 0.4% drop in fiscal 2020.
The board’s inflation projection for fiscal 2024 is 1.9%, little changed from 2.0% in April and 1.8% in January. Its forecast for 2025 is 1.6%, unchanged from its first estimate of 1.6% provided in April. This indicates that the banks’ battle to reflate the economy will remain prolonged.
The spike in consumer inflation to above 4% at the start of the year is mostly due to elevated energy and commodities costs aggravated by the relatively weak yen. The core CPI eased to a 3.1% annual rate in February and March after surging to a 41-year high of 4.2% in January. It stood at 3.3% in June.
The board’s median economic growth forecast for fiscal 2023 is 1.3%, revised down slightly from 1.4% projected three months ago. Its GDP forecast for fiscal 2024 was unrevised at 1.2%. The board expects the economy to grow at a slower pace of 1.0% in fiscal 2025, also unchanged from its April forecast.
Basic Easing Policy Stance in Place
At its two-day meeting that ended at around 1230 JST Friday (0430 GMT Friday/2330 EDT Thursday), the BOJ’s nine-member board decided in a unanimous vote to maintain its overall monetary easing stance under the yield curve control framework that 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.
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 minus 0.1% by charging 0.1% interest on a part of cash reserves parked at the bank by financial institutions.
The bank also confirmed its overshooting commitment, saying, “It 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% and stays above the target in a stable manner.”
“The bank will continue to maintain stability of financing, mainly of firms, and financial markets, and will not hesitate to take additional easing measures if necessary,” it concluded.
No Change to ETF, J-REIT Purchases
The BOJ board decided unanimously to leave the main asset purchase guidelines unchanged. Its dominant presence in the domestic stock markets has supported overall sentiment.
“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.
The bank will maintain the amount of outstanding of CP (commercial paper) at about 2 million yen. It will purchase corporate bonds at about the same pace as prior to the pandemic, so that their amounts outstanding will gradually return to pre-pandemic levels of about 3 trillion yen. “In adjusting the amount outstanding of corporate bonds, the bank will give due consideration to their issuance conditions,” it said, repeating its latest stance.