— BOJ Revises Down FY21 GDP Forecast, Upgrades FY22 Growth View
— BOJ Board’s CPI Outlook for FY22, FY23 Revised Up Slightly to Just Above 1%
— BOJ Vows to Continue Monetary Support Until 2% Inflation Target Achieved
By Max Sato
(MaceNews) – The Bank of Japan said Tuesday it is maintaining its interest rate targets and main asset purchase program to continue supporting economic recovery from the pandemic-caused slump and guiding gradually rising inflation toward its 2% target.
No change in policy was expected as the bank last month decided to end parts of its anti-Covid special financing program aimed at supporting large firms, whose financial conditions have improved, while extending its feature of helping hard-hit small businesses, particularly those in the service sector.
In its quarterly Outlook Report released Tuesday, the central bank noted that the pickup in the Japanese economy “has become evident” as the drag from the pandemic on global and domestic growth “has waned gradually.”
This marks an improvement from its October report and December policy statement that the economy “has picked up as a trend.”
BOJ Now Sees Risks to CPI Balanced
The BOJ remains optimistic about the medium-term economic outlook, basically repeating its view from October 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 thereafter.”
On the price front, however, the bank revised up its view that risks to CPI “are generally balanced” in light of a gradual upward move in consumer prices, led by rising energy and commodities markets. Previously, it said they were “skewed to the downside.”
The BOJ board again revised down its growth projections for the current fiscal year ending next March in the Outlook Report, compared to the previous report issued in October, but maintained its flat inflation outlook for fiscal 2021 as higher costs for fuels, utilities and processed food offset the base effect of large mobile phone fee discounts.
This was in line with expectations, given the lingering drag from the pandemic and global supply bottlenecks, although delays in parts supply have eased.
Looking ahead, the BOJ sharply revised up its GDP growth forecast and slightly revised up its CPI projection for fiscal 2022 to just above 1%, as largely expected.
“Japan’s economy is likely to recover as downward pressure stemming from COVID-19 on services consumption and the effects of supply-side constraints wane, while being supported by an increase in external demand, accommodative financial conditions, and the government’s economic measures,” the BOJ said, repeating its forecast in October.
In its Outlook Report, the BOJ noted a “virtuous cycle” – in which improvement in corporate profits lead to a rise in business fixed investment and pushes up income, and thus consumer spending – is expected to continue working.
“Japan’s economy is projected to continue growing a pace above its potential growth rate,” the bank said. It revised up its estimate of the rate to be “marginally positive” from “around zero to marginally positive” given in October.
On risk factors, the BOJ said “there are high uncertainties over future developments in overseas economies given the effects of supply-side constraints, as well as in commodity prices and their impact on economic activity and prices.”
This is milder than its October warning that “there are high uncertainties over whether the resumption of economic activity can progress smoothly while public health is being protected” and about “a risk that the effects of supply-side constraints seen in some areas will be amplified or prolonged.”
BOJ Revises Up FY22 CPI, GDP Forecast
For fiscal 2021 ending next March, the median forecast for the core consumer price index (excluding fresh food) by the board was 0.0%, unchanged from October. The core CPI inflation forecast for fiscal 2022 was revised up to 1.1% from 0.9% forecast in October. The board’s inflation projection for fiscal 2023 was also revised up slightly to 1.1% from 1.0%.
The board’s median economic growth forecast for fiscal 2021 was 2.8%, revised down from 3.4% in October, 3.8% in July and 4.0% in April, but that for fiscal 2022 was revised up to 3.8% from 2.9% in October, 2.7% in the previous outlook and 2.4% projected in April.
In fiscal 2023, the BOJ board expects the economy to grow at a slower pace of 1.1%, revised down from 1.3% projected about three months ago.
In its baseline outlook, the BOJ provided a slightly brighter view that the year-on-year change in the CPI “is likely to increase in positive territory for the time being,” compared to its October outlook that it is likely to rise “moderately in positive territory.”
“Thereafter, while the positive contribution of the rise in energy prices to the CPI is likely to wane, the underlying inflationary pressure is projected to increase, mainly on the bank of improvement in the output gap and the rise in medium- to long-term inflation expectations,” the BOJ said, largely repeating its recent conviction.
BOJ Stands Pat as Expected
At its two-day meeting that ended just before midday Tuesday (0300 GMT Tuesday/2200 EST Monday), 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.
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.
“The bank will purchase CP and corporate bonds with an upper limit on the amount outstanding of about 20 trillion yen in total until the end of March 2022.”