–No Longer Expects Short-, Long-Term Rates to Go Lower Than Now
–Ueda Has Told Diet, Reporters: ‘Appropriate’ to Continue Current Policy Framework; Underlying Inflation Has Not Reached 2%
By Max Sato
(MaceNews) – The Bank of Japan said Friday its policy board decided unanimously to maintain its monetary easing stance, keeping its zero to slightly negative interest rate targets along the yield curve and large asset purchases to continue seeking stable 2% inflation and support sustainable wage growth.
“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,” the bank said. “By doing so, it will aim to achieve the price stability target of 2% in a sustainable and stable manner, accompanied by wage increases.”
At the same time, the board will spend the next 12 to 18 months conducting a “broad-perspective review” of the costs and benefits of the bank’s various monetary easing measures implemented in the past 25 years. Achieving price stability “has been a challenge” since late 1990s when Japan plunged into deflation, it said.
No Longer Pushing for Lower Rates
In a subtle tweak, the bank removed its long-held stance from its policy statement while maintaining its pledge that it will not hesitate to take additional easing measures if necessary. Until at the last meeting, in March, the bank concluded that “it also expects short- and long-term policy interest rates to remain at their present or lower levels.”
It is a delicate balancing act. The bank’s policymakers feel that they must continue easing to achieve 2% inflation but they are also aware that they have to prepare gradually for an eventual exit from the current large-scale easing program.
The board projected consumer inflation will edge below its 2% target in fiscal 2023 after a temporary spike to 3% in fiscal 2022, which was caused by last year’s high import and producer costs arising from Russia’s invasion of Ukraine and prolonged supply constraints.
The two-day policy meeting that ended Friday was the first one under Governor Kazuo Ueda, who took office on April 9. He has told lawmakers and reporters that it is “necessary and appropriate” to continue monetary easing under the current economic conditions in order to achieve stable 2% inflation and help firms raise wages.
Ueda, the first academic to lead the bank, took over from Haruhiko Kuroda, a former top finance ministry policymaker who led the bank’s ‘unprecedented’ large-scale monetary easing campaign for nearly 10 years based on the central bank’s policy coordination agreement with the government as part of a reflationary Abenomics policy mix of aggressive monetary easing, flexible fiscal spending and growth strategies.
Ueda served on the BOJ’s nine-member policy board from 1998 until 2005 under the revised Bank of Japan Act that called for more transparency in the decision-making process and independence of political influences. During that period, the bank conducted zero interest policy and its first quantitative easing to guide economic recovery after the Asian financial crisis and the collapse of some domestic lenders and brokers.
BOJ Keeps Interest Rate Targets, Asset Purchases
The bank’s board unanimously maintained its decision made in December to allow the yield on the 10-year Japanese government bonds to rise to 0.5% from the previous cap of 0.25%, which was designed to meet upward pressures arising from last year’s aggressive tightening by other major central banks. The bank also hopes to revive some of the paralyzed market function under its yield curve control regime.
The BOJ board confirmed that the bank will continue offering to buy 10-year Japanese government bonds at a fixed rate of 0.5% every business day, “unless it is highly likely that no bids will be submitted.” The board decided to introduce this new type of market operation in April 2022.
Board Sees Core CPI Easing Below 2% in Fiscal 2025
In its quarterly Outlook Report, which was issued at the end of the bank’s two-day meeting, the BOJ board revised up its forecast for inflation for the current fiscal year ending next March while foreseeing consumer prices will lose some steam and fail to reach the bank’s elusive 2% target in a sustainable manner.
“With regard to the risk balance, risks to economic activity are skewed to the downside for fiscal 2023 but are generally balanced thereafter,” the bank said, basically repeating its analysis provided in January.
“Risks to prices are skewed to the upside for fiscal 2023 but are skewed to the downside for fiscal 2025” it said, pointing to the downside risk that was not present in the January report.
For fiscal 2023 ending in March 2024, the median forecast for the year-on-year increase in the core consumer price index (excluding fresh food) is 1.8%, compared to 1.6% forecast in January. In fiscal 2022 that ended last month, the core CPI rose 3.0%, as projected by the board, after rising 0.1% in fiscal 2021 and falling 0.4% in fiscal 2020.
The board’s inflation projection for fiscal 2024 is 2.0%, up from 1.8% in January, but its forecast for 2025, the first estimate, is 1.6%. This indicates that the banks’ battle to reflate the economy will remain prolonged.
The BOJ expects the rate of increase in the core CPI to accelerate moderately as the output gap improves from the current oversupply and as medium- to long-term inflation expectations and wage growth rise.
The recent spike in consumer inflation to above 4% is mostly due to elevated energy and commodities costs aggravated by the relatively weak yen. The core index has eased to a 3.1% annual rate in March after rising 3.1% in February and surging at a 41-year high of 4.2% in January.
Board Expects Slower GDP Growth
The board’s median economic growth forecast for fiscal 2023 is 1.4%, revised down from 1.7% projected three months ago. Its GDP forecast for fiscal 2024 was revised up slightly to 1.2% from 1.1%. The board expects the economy to grow at a slower pace of 1.0% in fiscal 2025 (its first estimate).
“Japan’s economy is likely to recover moderately toward around the middle of fiscal 2023, supported by factors such as the materialization of pent-up demand, although it is expected to be under downward pressure stemming from past high commodity prices and a slowdown in the pace of recovery in overseas economies,” the bank said.
“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 warned that the pace of growth is “highly likely to decelerate gradually toward the end of the projection period (from fiscal 2023 to fiscal 2025).”
Looking ahead, the bank repeated its recent risk assessment that “there are extremely high uncertainties for Japan’s economy” including developments in overseas economic activities and prices, the Ukraine war, commodity prices, although it stopped mentioning the drag from the pandemic as new Covid cases have been largely contained.
“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 bank said, repeating its recent mantra.
Easing Policy Stance in Place but Covid Forward Guidance Dropped
At its two-day meeting that ended at around 1300 JST Friday (0400 GMT/0000 EDT), the BOJ’s nine-member board decided in a unanimous vote to maintain its overall 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.
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.
It is shorter than its long-held message sent until the March meeting:
“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.”
A few months before the end of his second five-year term, Kuroda had said the bank could change this part of its forward guidance because it is mainly designed to minimize the impact of the pandemic.
No Change to ETF, J-REIT Purchases
The BOJ board decided unanimously to leave the main asset purchase guidelines unchanged. Its dominant presence in the domestic stock markets has supported overall sentiment.
“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.