By Max Sato
(MaceNews) – The Bank of Japan said Thursday it is maintaining its super-low interest rate targets along the yield curve and large asset purchases, as expected, to help the economy fully recover from the pandemic-caused slump and anchor inflation around its stable 2% target.
To keep speculative market forces from pushing the long-term bond yield beyond the its defense line, the bank also said it will continue offering to buy 10-year Japanese government bonds at a fixed rate of 0.25 percent every business day “unless it is highly likely that no bids will be submitted.” The board decided to introduce this new market operation at its last meeting in April.
The bank has been guiding the 10-year JGB yield around zero to maximize the impact of monetary easing but it allows market rates to fluctuate between minus 0.25% to plus 0.25%.
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 overall economic sentiment.
BOJ Revises Up CPI Outlook, Downgrades Near-Term Growth
In its quarterly Outlook Report, which was issued Thursday, the BOJ board revised up its forecast for inflation for the next few years in light of rising energy and food costs while lowering its projection for economic growth for the current fiscal year ending next March.
For fiscal 2022 ending in March 2023, the median forecast for the core consumer price index (excluding fresh food) by the board was 2.4%, up from 1.9% projected in April and 1.1% in January. It will follow a slight 0.1% rise in fiscal 2021 and a 0.4% fall in fiscal 2020.
The sharp upward revision in April was largely due to the fading base effect of large discounts on mobile phone fees introduced in April 2021 and expanded in the following months. The latest upward revision to the CPI for the near term reflects “the impact of a rise in import prices and of a pass-through of that rise to consumer prices.”
The core CPI inflation forecast for fiscal 2023 was 1.4%, up from 1.1% in both April and January. The board’s inflation projection for fiscal 2024 was 1.3%, also up from 1.1% in April, its first estimate.
The board’s median economic growth forecast for fiscal 2022 was 2.4%, revised down from 2.9% in April and 3.8% in January in the face of slower growth in other economies and intensified supply constraints.
The board’s GDP forecast for fiscal 2023 was revised up to 2.0% from 1.9% three months ago and 1.1% six months ago while the board expects the economy to grow at a moderate pace of 1.3% in fiscal 2024, up from 1.1% forecast in April, its first estimate. The upward revisions are in reaction to a downgrade for the current fiscal year, the bank said.
Japan’s Economy Picking Up as Covid Drag Wanes
The BOJ sounded slightly more upbeat about the current status of the Japanese economy in its July report, saying it “has picked up with the impact of Covid-19 waning, despite being affected by factors such as a rise in commodities prices.” Last month and in its April report, the bank said the economy “has picked up as a trend” with some weakness caused by Covid-19 and higher commodities prices.
The BOJ remains confident about recovery from the pandemic-caused slowdown, repeating its assessment from its previous Outlook Report issued on April 28.
“Japan’s economy is likely to recover, with the impact of Covid-19 and supply-side constraints waning and with support from an increase in external demand, accommodative financial conditions, and the government’s economic measures, although it is expected to be under downward pressure stemming from a rise in commodities prices due to factors such as the situation surrounding Ukraine,” it said in the July report.
Looking ahead, the bank repeated its recent assessment that “there remain extremely high uncertainties for Japan’s economy” including developments in the pandemic, the Ukraine war and commodities prices.
“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 policy statement issued after the previous meeting on June 16-17, when it added a reference to fluctuations in the currency market without specifically mentioning the sharp depreciation of the yen.
BOJ Continues to See Risks to CPI Balanced After Temporary Rise
The BOJ remains optimistic about the medium-term economic outlook, basically repeating its view from April that risks to economic growth are “skewed to the downside for the time being, but are generally balanced thereafter.”
The bank dropped its reference to “the impact of Covid-19 and the situation surrounding Ukraine” probably because the world has been dealing with those factors for long.
On the prince front, the bank also maintained its recent outlook that risks to CPI “are skewed to the upside for the time being but generally balanced thereafter.”
“Japan’s economy is projected to continue growing at a pace above its potential growth rate,” the bank said, repeating its recent projection. It estimates the rate to be in a range of zero to 0.5%.
The board continues to assume that the drag from high commodities prices wanes and a “virtuous cycle from income to spending” – in which improvement in corporate profits leads to a rise in business fixed investment and pushes up income, and thus consumer spending – “intensifies gradually.”
Easing Policy Stance Unchanged
At its two-day meeting that ended just after midday Thursday (0300 GMT Friday/2300 EDT Wednesday), 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 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.
“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.
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 five-year terms of Kataoka and Hitoshi Suzuki, formerly a commercial banker, are scheduled to end on July 23. Kataoka will be replaced by Hajime Takata, a private-sector economist who has warned about the side effects of aggressive monetary easing and is currently chairman of the Global Research Center at Okasan Securities. Naoki Tamura, a senior adviser to Sumitomo Mitsui Banking, will replace Suzuki.
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. 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.
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Contact this reporter: max@macenews.com
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