–Board Sees 3% Core CPI Rise in FY22 to Slow to 1.6% in FY23, 1.8% in FY24
–Board Revises Down GDP Forecasts to 1.9% in FY22, 1.7% in FY23, 1.1% in FY24
By Max Sato
(MaceNews) – The Bank of Japan said Wednesday its policy board decided unanimously to maintain its basic monetary easing stance, keeping its zero to slightly negative interest rate targets along the yield curve and large asset purchases, against the backdrop of a possible recession in other major economies and an expected waning in inflation from the current spike boosted by high import costs.
Last month, the board decided unanimously to allow the yield on the 10-year Japanese government bonds to rise to 0.5% from the previous cap of 0.25% amid upward pressures arising from aggressive tightening by other major central banks, as the bank hoped to revive some paralyzed market functions under its yield curve control regime.
The board confirmed its December decision that the bank will offer to buy 10-year Japanese government bonds at a fixed rate of 0.5% every business day, “unless it is highly likely that no bids will be submitted.” The board decided to introduce this new type of market operation in April.
“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 increasing the amount of JGB purchases and conducting fixed-rate purchase operation,” the bank said.
Governor Haruhiko Kuroda told reporters after the Dec. 19-20 meeting that the move was an “adjustment” and should not be termed as a rate hike. He has said the bank would not consider raising interest rates while inflation is not accompanied by solid wage growth (real wages are falling) and supply continues to exceed demand in the Japanese economy.
The BOJ has one more policy meeting, on March 9-10, before Kuroda’s second five-year term ends on April 8.
“Thereafter, it is projected to accelerate again moderately on the back of improvement in the output gap and rises in medium- to long-term inflation expectations and in wage growth,” the bank said, repeating its outlook provided last month. It also noted that the government program to push down energy prices for consumers will taper off toward the middle of fiscal 2023.
Board Revises Up FY22 CPI Outlook but Sees Below-Target Inflation in FY23, 24
In its quarterly Outlook Report, which was issued at the end of the bank’s two-day meeting Wednesday, the BOJ board slightly revised up its forecast for inflation for the current fiscal year while foreseeing consumer prices will lose stem and fail to reach the bank’s elusive 2% target.
“With regard to the risk balance, risks to economic activity are skewed to the downside for fiscal 2022 and 2023 but are generally balanced for fiscal 2024,” the bank said, noting an easing of risks toward the end of the current forecast period.
“Risks to prices are skewed to the upside,” it said, repeating its assessment from October.
For fiscal 2022 ending in March 2023, the median forecast for the year-on-year increase in the core consumer price index (excluding fresh food) is 3.0%, up further from 2.9% projected in October, 2.4% in July and 1.9% in April. It would follow a slight 0.1% rise in fiscal 2021 and a 0.4% fall in fiscal 2020.
The core CPI inflation forecast for fiscal 2023 is 1.6%, unchanged from the 1.6% forecast in October, when it was revised up from 1.4% in July and 1.1% in April. The board’s inflation projection for fiscal 2024 is 1.8%, up from 1.6% in October, 1.3% in July and 1.1% in April.
The current spike in consumer inflation to around 4% is mostly due to elevated energy and commodities costs aggravated by the relatively weak yen. Service prices are being flat (up just 0.7% on year in November versus a 6.7% rise in goods prices), reflecting slow wage hikes.
The board’s median economic growth forecast for fiscal 2022 is 1.9%, revised down slightly from 2.0% in October and compares to 2.4% in July and 2.9% in April. Its GDP forecast for fiscal 2023 was revised down further to 1.7% from 1.9% projected three months earlier and 2.0% in July and 1.9% in April.
The board expects the economy to grow at a moderate pace of 1.1% in fiscal 2024, revised down from its October projection of 1.5% and compares to 1.3% forecast in July and 1.1% in April.
BOJ Continues to See Japan Economic Recovery Despite Headwinds
The BOJ maintained its assessment on current conditions, saying, “Japan’s economy, despite being affected by factors such as high commodities prices, has picked up as the resumption of economic activity has progressed while public health has been protected from Covid-19.”
“Toward the middle of the projection period [from fiscal 2022 to 2024], Japan’s economy is likely to recover, with the impact of Covid-19 and supply-side constraints waning and with support from accommodative financial conditions and the government’s economic measures, although it is expected to be under downward pressure stemming from high commodities prices and slowdowns in overseas economies,” the bank said, largely repeating its outlook provided last month and in its previous Outlook Report.
The bank also remains optimistic about the positive economic growth mechanism, repeating its standard outlook: “From the middle of the projection period, Japan’s economy is projected to continue growing at a pace above its potential growth rate as a virtuous cycle from income to spending intensifies gradually in the overall economy.” The BOJ estimates the rate to be in a range of zero to 0.5%.
Looking ahead, the bank repeated its recent risk assessment that “there remain extremely high uncertainties for Japan’s economy” including developments in overseas economic activities and prices, the Ukraine war, commodity prices and the course of the pandemic at home and aboard.
“In this situation, 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 bank said, repeating its recent mantra. The yen has regained some ground against the dollar but it is still weak, limiting Japan’s purchasing power.
Easing Policy Stance Unchanged
At its two-day meeting that ended at 11:33 a.m. JST Wednesday (0233 GMT Wednesday/2133 EST Tuesday), 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 inflation-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.”
“For the time being, while closely monitoring the impact of Covid-19, the bank will support financing, mainly of firms, and maintain stability in financial markets, and will not hesitate to take additional easing measures if necessary; it also expects short- and long-term policy interest rates to remain at their present or lower levels,” the bank said, repeating its recent statement.
In a largely technical move to ensure accommodative financial conditions, the board decided unanimously to (1) extend by one year the deadline for loan
disbursement under the Fund-Provisioning Measure to Stimulate Bank Lending, (2) expand the range of eligible counterparties for the Funds-Supplying Operations to Support Financing for Climate Change Responses to include member financial institutions of central organizations of financial cooperatives, and (3) enhance the Funds-Supplying Operations against Pooled Collateral.
No Change to ETF, J-REIT Purchases
The BOJ board decided unanimously to leave the main asset purchase guidelines unchanged, as seen in recent meetings. 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. It will also purchase CP (commercial paper) and corporate bonds at about the same pace as prior to the pandemic, “so that their amounts outstanding will gradually return to pre-pandemic levels, namely, about 2 trillion yen for CP and about 3 trillion yen for corporate bonds.”
“In adjusting the amount outstanding of corporate bonds, the bank will give due consideration to their issuance conditions,” it added.