BOJ Keeps Easing Stance; Upbeat on FY22 GDP, Sees CPI Rise on Energy
–BOJ To Back Climate Change Initiatives With Zero Rate Funding
By Max Sato
(MaceNews) – The Bank of Japan said Friday it is maintaining its stimulative policy, as expected, to help the economy climb out of the pandemic-induced doldrums and guide near-zero inflation gradually toward its 2% target.
At its two-day meeting that ended on Friday, 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 mantra.
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.
In its quarterly Outlook Report issued after the meeting, the central bank was more upbeat about economic recovery in the next fiscal year starting in April 2022, “mainly due to progress in vaccinations,” while revising down its forecast for fiscal 2021 as the recent global surge in coronavirus infections is expected to continue hurting face-to-face services.
The bank expects inflation to pick up gradually from around zero now and reach 1% in about two to three years, a standard scenario little changed from its previous report released in April. Rising energy prices prompted the BOJ to revise up its inflation outlook for fiscal 2021.
The BOJ appeared to be more positive about Japan’s medium-term outlook, saying 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 (fiscal 2021 to 2023) onward.” Previously, it had simply referred to the downside.
On the price front, however, the bank repeated its assessment that risks to CPI “are skewed to the downside.”
The board repeated that the board’s outlook is “highly unclear” due to the lingering pandemic.
“Although the level of Japan’s economic activity, particularly in the face-to-face services sector, is expected to be lower than that prior to the pandemic for the time being, the economy is likely to recover, with the impact of COVID-19 waning gradually,” the BOJ said in the Outlook Report, also repeating its view from April.
BOJ Sees Modest CPI Rise, Firmer GDP in FY22
For fiscal 2021 ending next March, the median forecast for the core consumer price index (excluding perishables) by the board was +0.6%, revised up from +0.1% projected in April, when it was revised down to factor in large discounts in mobile phone charges by many carriers for various plans. A sharp rise in gasoline prices is leading the recent uptick in the CPI.
The core CPI forecast for fiscal 2022 was little changed at +0.9%, only slightly up from +0.8% forecast in April; the board’s projection for fiscal 2023 remains at +1.0%. BOJ policy-makers believe the gradual reopening of the economy should support higher consumer prices amid rising energy 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 +3.8%, revised down from +4.0% forecast three months ago, but that for fiscal 2022 was revised up to +2.7% from +2.4% in the previous outlook.
In the following year, the BOJ board still expects the economy to grow at a slower pace of +1.3%, as projected in April.
In its baseline outlook, the BOJ said the year-on-year change in the core CPI “is likely to be at around 0 percent in the short run” but that later “it is expected to increase gradually.” This statement is more upbeat than the summary from the April report, which said the y/y change in the core reading “is likely to be slightly negative for the time being .… Thereafter, it is expected to turn positive and then increase gradually.”
At its previous meeting on June 17-18, the bank decided to extend the term of its special COVID-19 fund-supplying operations by six months, again, until the end of March 2022 to encourage financial institutions to lend more to needy small businesses.
At the time, the BOJ also decided to launch a new funding scheme, by year-end, to support banks that are lending to or investing in projects that are designed to address climate change, which it noted will have an “extremely large impact” on the economy, prices and financial conditions in the longer term.
BOJ Funding To Support Climate Change Initiatives Until End FY30
After the latest meeting, the BOJ announced that the new funding will cover green loans and bonds, sustainability-linked loans and bonds as well as transition finance.
It will provide yen-denominated funds to lenders at zero interest rate against pooled collateral for one year in principle, it said.
The program will start by the end of 2021 and run through fiscal 2030 ending in March 2031.
Core Easing Tools Unchanged
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 of about Y20 trillion in total until the end of March 2022.