–BOJ Repeats: To ‘Patiently’ Pursue Stable 2% Inflation
–BOJ Maintains Negative Short-Term Rate, Zero Long-Term Rate; Keeps 1% Loose Upside Limit on 10-Year JGB Yield
By Max Sato
(MaceNews) – The Bank of Japan said Tuesday its policy board decided unanimously, as expected, to maintain its seven-year-old yield curve control framework and retain its guidance that it will “patiently continue with monetary easing” in order to “achieve the price stability target of 2% in a sustainable and stable manner, accompanied by wage increases.”
In a decade-long pursuit of stable 2% inflation, the board decided in a unanimous vote to keep the targets of minus 0.1% for the short-term policy rate and “around zero percent” for the 10-year bond yield, the latter of which has a flexible 1% upper limit after having been adjusted twice last year in the face of ripple effects of higher U.S. bond yields.
The bank also said the board decided unanimously to extend by one year the deadline for loan disbursement under the fund-provisioning measure to stimulate bank lending, one of its easing tools.
The move to make the long end of the yield curve control framework “more flexible,” in October and July, is regarded by some as a gradual step toward phasing out the framework and is seen by others as an effective end to the policy tool adopted in September 2016. The bank hopes to allow a natural uptick in long-term interest rates that reflects economic recovery with substantial wage hikes and mitigate the negative impact of artificially suppressing interest rates, which has paralyzed bond market functions.
The market focus remains on when the central bank will end its negative interest rate policy introduced in January 2016. The BOJ charges 0.1% interest on a part of cash reserves parked at the bank by financial institutions, which is designed to encourage banks to lend more, but it is unpopular among lenders as it squeezes their profit margins.
BOJ policymakers are expected to maintain their easing stance at least until April, when they hope to see clearer signs that wages will continue rising substantially. The results of annual wage negotiations between major firms and their trade unions won’t be available until mid-March and indications of how that will influence smaller firms, which employ about 70% of the workforce, are likely to emerge after the April 1 start of fiscal 2024.
Patiently Pursuing Stable 2% Inflation with Monetary Easing
The bank stressed that its accommodative monetary policy stance is necessary to complete its mission that began in January 2013, when it reluctantly agreed to adopt a clear 2% inflation target in exchange for a government promise to work on public debt and structural reforms.
“With extremely high uncertainties surrounding economies and financial markets at home and abroad, the bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions,” it said, repeating its recent mantra. “By doing so, it will aim to achieve the price stability target of 2% in a sustainable and stable manner, accompanied by wage increases.”
This statement was first issued in April 2023 just after Kazuo Ueda took office as governor and has been repeated at every meeting since then.
BOJ Sticks to Its Modest Economic Recovery Outlook Amid ‘Extremely High Uncertainties’
“Japan’s economy is likely to continue recovering moderately for the time being,supported by factors such as the materialization of pent-up demand, although it is expected to be under downward pressure stemming from a slowdown in the pace of recovery in overseas economies,” the bank said, repeating its assessment in its quarterly Outlook Report for October.
“Thereafter, as a virtuous cycle from income to spending gradually intensifies, Japan’s economy is projected to continue growing at a pace above its potential growth rate,” which is estimated to be zero to 0.5%, the bank said.
Looking ahead, the bank also repeated its recent assessment that “there are extremely high uncertainties” surrounding Japan’s economy including developments in overseas economic activities and prices, commodity prices as well as domestic firms’ wage- and price-setting behavior.
“Under these circumstances, 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 BOJ said, also repeating its past statements.
The BOJ maintained its latest inflation outlook that the year-on-year increase in the core CPI (excluding fresh food prices) is likely to be above 2% through fiscal 2024 to March 31, 2025, due to the remaining pass-through effects of cost increases led by the past rise in import prices, but that the rate of increase will decelerate thereafter as those effects wane.
“Meanwhile, toward the end of the projection period, underlying CPI inflation is likely to increase gradually toward achieving the price stability target, as the output gap turns positive and as medium- to long-term inflation expectations and wage growth rise,” the bank said, also repeating the October Outlook Report.
The Cabinet Office estimates that the output gap has slipped back into negative territory in the July-September quarter after turning slightly positive in April-June for the first time in three and a half years. Average cash earnings per regular employee in Japan posted 23rd straight year-on-year rise, up 0.2% in November, while real average wages fell 3.0% in for the 20th consecutive drop.
Board Still Sees Inflation Just Below 2%, Slow 1% GDP Growth in Fiscal 2025
“With regard to the risk balance, risks to both economic activity and prices are generally balanced,” the bank said, indicating a more stable path. In October, it said risks to economic activity were generally balanced for fiscal 2023 and 2024 but were skewed to the downside for fiscal 2025, and that risks to prices were skewed to the upside for fiscal 2023.
For fiscal 2023 ending in March 2024, the median forecast for the year-over-year increase in the core consumer price index (excluding fresh food) is 2.8%, unchanged from October. It will be slightly lower than the 3.0% spike seen in fiscal 2022 but much higher than the 0.1% rise in fiscal 2021 and the 0.4% drop in fiscal 2020.
The board’s inflation projection for fiscal 2024 is 2.4%, revised down from 2.8% in October, when it was raised sharply from 1.9% in July. Its forecast for 2025 is 1.8%, compared to 1.7% provided three months ago.
The spike in consumer inflation to above 4% at the start of calendar 2023 is mostly due to elevated energy and commodities costs aggravated by the relatively weak yen. The core CPI eased to a 3.1% annual rate in February and March after surging to a 41-year high of 4.2% in January. Inflation moderated to a 16-month low of 2.5% in November from 2.9% in October.
The board’s median economic growth forecast for fiscal 2023 is 1.8%, revised down from 2.0% projected about three months ago. Its GDP forecast for fiscal 2024 is at 1.2%, revised up from 1.0% previously. The board expects the economy to grow at 1.0% in fiscal 2025, unchanged its October forecast.
Basic Easing Policy Stance in Place
At its two-day meeting that ended shortly after 1200 JST Tuesday (0300 GMT Tuesday/2200 EST Monday), the BOJ’s nine-member board decided in a unanimous vote on ways to manage the yield curve control framework and its guideline on asset purchases.
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 will regard the upper bound of 1.0 percent for 10-year JGB yields as a reference in its market operations, and in order to encourage the formation of a yield curve that is consistent with the above guideline for market operations, it will continue with large-scale JGB purchases and make nimble responses for each maturity by, for example, increasing the amount of JGB purchases and conducting fixed-rate purchase operations and the Funds-Supplying Operations against Pooled Collateral,” it said.
The bank also confirmed its 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.”
“The bank will continue to maintain stability of financing, mainly of firms, and financial markets, and will not hesitate to take additional easing measures, if necessary,” it concluded.
No Change to ETF, J-REIT Purchases
The BOJ board decided unanimously to maintain the main asset purchase guidelines. The bank uses its dominance in domestic shareholdings to prop up the market sentiment, which in turn should have a positive impact on economic activity.
“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 maintain the amount of outstanding of CP (commercial paper) at about 2 million yen. It will purchase corporate bonds at about the same pace as prior to the pandemic, so that their amounts outstanding will gradually return to pre-pandemic levels of about 3 trillion yen. “In adjusting the amount outstanding of corporate bonds, the bank will give due consideration to their issuance conditions,” it said, repeating its latest stance.