By Max Sato
(MaceNews) – The Bank of Japan said Thursday it is maintaining its stimulative policy, as expected, to support economic recovery from the pandemic-caused 2020 slump and continue guiding near-zero inflation toward its elusive 2% target.
The BOJ board revised down its growth and inflation projections for the current fiscal year ending next March in its quarterly Outlook Report, compared to the previous report issued in July, but the CPI downward revision was technical due to the government’s statistical update on the base year and items in the CPI basket of goods and services that takes place every five years to correct the data’s upward bias.
Looking ahead, the BOJ slightly revised up its GDP growth forecast for fiscal 2022 and upgraded its assessment that inflation expectations “have picked up” from its July statement that they “have been more or less unchanged.”
BOJ Stands Pat As Expected
At its two-day meeting that ended just before midday Thursday, the BOJ’s nine-member board decided 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.
“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.
BOJ Repeats: GDP Risks More Balanced Toward FY23
In the latest Outlook Report, the central bank maintained its cautiously optimistic view on Japan’s economic recovery as Covid-19 vaccination makes progress and firms are trying to overcome supply constraints.
The bank stressed that its “virtuous cycle” theory should work, saying that “… with improvement spreading from the corporate sector to the household sector, the recovery trend in the overall economy is projected to become more pronounced.”
The bank expects inflation to pick up gradually from around zero now and reach 1% in about two to three years, a standard scenario unchanged from its previous reports released in July and April.
The BOJ continues to see solid medium-term outlook for Japan’s resilient GDP, repeating the July statement that risks to economic growth are “skewed to the downside for the time being, mainly due to the impact of COVID-19, but are generally balanced for the middle of the projection period onward.” Until in the April report, it had highlighted risks to the downside for both growth and inflation.
On the price front, the bank also maintained its assessment that risks to CPI “are skewed to the downside.”
On risk factors, the BOJ cautioned that “there are high uncertainties over whether the resumption of economic activity can progress smoothly while public health is being protected.” It also called for attention to “a risk that the effects of supply-side constraints seen in some areas will be amplified or prolonged.”
BOJ Revises Up FY22 GDP Forecast
For fiscal 2021 ending next March, the median forecast for the core consumer price index (excluding perishables) by the board was 0%, revised down from +0.6%. CPI data’s base year shift to 2020 from 2015 in August resulted in sharp downward revisions to recent figures, reflecting large discounts in mobile phone charges by major carriers in April, which was given a heavier weighting in the latest statistical formula.
The core CPI forecast for fiscal 2022 was unchanged at +0.9% in July. The board’s inflation projection for fiscal 2023 also remains at +1.0%.
BOJ policymakers believe the gradual reopening of the economy should support higher consumer prices amid rising energy and commodities markets as the base effect of the April 2021 reduction in mobile charges wanes next spring.
The board’s median economic growth forecast for fiscal 2021 was +3.4%, revised down from +3.8% in July and +4.0% in April, but that for fiscal 2022 was +2.9%, up from +2.7% in the previous outlook and +2.4% projected in April.
In fiscal 2023, the BOJ board still expects the economy to grow at a slower pace of +1.3%, as projected in the previous two reports.
In its baseline outlook, the BOJ said the year-on-year change in the core CPI “is likely to increase moderately in positive territory for the time being, reflecting a rise in energy prices,” which is more upbeat that its previous outlook that the core measure “is like to be at around 0 percent in the short run.
“Thereafter, albeit with fluctuations due to temporary factors, it is projected to increase gradually as trend, mainly on the back of improvement in the output gap and a rise in medium- to long-term inflation expectations,” the BOJ said.
The BOJ repeated its view from its September meeting that supply chain disruptions are affecting some Japanese exports and factory output, but that they are still “increasing.”
The bank said private consumption “has shown signs of a pickup recently, although downward pressure has remained strong,” a slightly brighter view than its previous assessment that consume spending remains “stagnant.”
BOJ Unlikely To Taper Soon
While other major central banks are gradually tapering or discussing reducing large asset purchases as part of normalizing monetary policy, the BOJ is unlikely to join the bandwagon, given that it is still far from even reaching the halfway point of achieving its 2% inflation target and the negative output gap of the Japanese economy remains wide.
The pace of the BOJ’s bond purchases has already slowed from a peak and it has made its holdings of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) seem less dominant in the stock markets (buying them “as necessary”) in response to criticism that the bank was distorting price formation.
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.
The BOJ will continue purchasing 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, on annual paces of increase in their amounts outstanding.
The bank will also purchase CP and corporate bonds with an upper limit on the amount outstanding.