–BOJ Vows to Keep Monetary Support Until 2% Inflation Achieved Despite Weak Yen
–Japan Economy Likely to Recover As Pandemic Impact, Supply Bottlenecks Ease
–BOJ Board: Core CPI Y/Y Up 1.9% in FY22 Before Slowing to 1.1% in FY23 As Energy Effects Wane
By Max Sato
(MaceNews) – The Bank of Japan said Thursday it is maintaining its super-low interest rate targets and large-scale asset purchase program to continue supporting economic recovery and guiding inflation toward its stable 2% target amid the lingering effects of the pandemic and the Ukraine war.
To keep the long-term bond yield from rising, the bank also decided to offer to buy 10-year Japanese government bonds at a fixed rate of 0.25 percent every business day through market operations “unless it is highly likely that no bids will be submitted.”
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%.
BOJ policymakers once again made it clear that they are pursuing the path toward boosting inflation past 2% and anchoring it around that level by injecting cash into the financial system, despite concerns that monetary easing at the time of a shift to tightening by other major central banks could erode the value of the yen further and push up import costs of food and energy.
The yen’s weakness against the dollar is coming from the wide interest rate differential between Japan and the US, where the Federal Reserve is tightening credit to help bring soaring inflation down to its target.
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 economic sentiment.
Japan Economy To Recover Despite Headwinds
In its quarterly Outlook Report, which was issued Thursday, the BOJ board revised down its GDP forecast for the current fiscal year ending next March amid uncertainty over Ukraine, but revised up its growth projection for the following year, as largely expected.
The board expects the core CPI (excluding fresh food) annual rate to temporarily increase to just under 2 percent in fiscal 2022 as the base year effects of mobile phone charge discounts dissipate, but the board sees the CPI rise slipping back to just above 1 percent in fiscal 2023 as the boosting effects of high energy costs wane.
The BOJ largely maintained its overall assessment, saying Japan’s economy “has picked up as a trend” with some weakness caused by Covid-19 and higher commodities prices. It revised down its view slightly last month, compared to its statement in January: “A pick-up in Japan’s economy has become evident as the impact of Covid-19 at home and abroad has waned gradually.”
The BOJ remains confident about recovery from the pandemic-caused slowdown,
largely repeating its assessment from its previous Outlook Report issued on Jan. 18.
“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 April report.
In January, it said: “Japan’s economy, although expected to be affected by a rise in commodity prices, is likely to recover, with downward pressure stemming from Covid-19 on services consumption and the effects of supply-side constraints waning and with support from an increase in external demand, accommodative financial conditions, and the government’s economic measures.”
BOJ Sees Risks to CPI Balanced After Temporary Rise
The BOJ remains optimistic about the medium-term economic outlook, basically repeating its view from January that risks to economic growth are “skewed to the downside for the time being, mainly due to the impact of COVID-19 and the situation surrounding Ukraine (added the Ukraine crisis), but are generally balanced thereafter.”
On the price front, the bank said risks to CPI “are skewed to the upside for the time being, mainly reflecting uncertainties over energy prices, but generally balanced thereafter,” reflecting a further rise in energy and commodities markets sparked by the Ukraine war. In January, it said risks “are generally balanced” in light of a gradual upward move in consumer prices. It upgraded its price view in January. Until October, it had said the risks were “skewed to the downside.”
“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 “marginally positive.”
That’s based on the bank’s assumption 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 in the overall economy.”
BOJ Revises Up FY22 CPI Forecast, Downgrades GDP Projection
For fiscal 2022 ending in March 2023, the median forecast for the core consumer price index (excluding fresh food) by the board was 1.9%, up sharply from 1.1% in January.
In fiscal 2021, the core CPI edged up 0.1% from fiscal 2020, when the key index fell 0.4%, following three years of increase, data released last week showed. The downward pressure from mobile phone fee discounts was offset by sharp gains in food, utilities and fuels as well as markups in property insurance premiums and fading effects of subsidized hotel fee discounts in parts of fiscal 2020.
The core CPI inflation forecast for fiscal 2023 was 1.1%, unchanged from January. The board’s inflation projection for fiscal 2024 was also 1.1%, its first estimate.
The board’s median economic growth forecast for fiscal 2022 was 2.9%, revised down from 3.8% in January while that for fiscal 2023 was revised up to 1.9% from 1.1%. In its first estimate, the BOJ board expects the economy to grow at a moderate pace of 1.1% in fiscal 2024.
In its baseline outlook, the BOJ projected that the year-on-year change in the CPI is “likely to increase temporarily to around 2% — due to the impact of a significant rise in energy prices — in fiscal 2022, when the effects of a reduction in mobile phone charges dissipate.”
“Thereafter, however, the rate of increase is expected to decelerate because the positive contribution of the rise in energy prices to the CPI is likely to wane,” it said.
Key Easing Policy Stance Unchanged
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, 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, largely repeating its recent statement but stressing that it will support financing needs.
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.
Pandemic Era Asset Buying Already Adjusted in Recent Months
Last month, the bank decided that from April onward, it would lower its holdings of commercial paper and corporate bonds so that their amounts outstanding will “gradually” return to pre-pandemic levels of about Y2 trillion for CP and about Y3 trillion yen for corporate bonds. It bought these assets with an upper limit on the amount outstanding of about Y20 trillion in total until the end of March.
The BOJ made no changes to its programs to support firms hit by the pandemic.
The bank decided in December to end parts of its anti-Covid special financing program aimed at supporting large firms, whose financial conditions have improved, at the end of March 2022, as scheduled, while extending its feature of helping hard-hit small businesses, particularly those in the service sector, for six months until the end of September.