BoJ Holds Policy Steady, Lowers Inflation Forecasts


The Bank of Japan left its key short-term interest rate unchanged at -0.1 percent at its January meeting and kept the target for the 10-year government bond yield at around zero percent. At the same time, the central bank lowered inflation forecast for fiscal 2019 to average 1.1 percent from an earlier projection of 1.6 percent, mainly due to a decline in crude oil prices and worries over global economic outlook.

In a quarterly outlook report, the BoJ also lowered slightly the inflation forecast for fiscal 2018 to average 0.8 percent from 0.9 percent previously estimated. In addition, policymakers now expects inflation to average 1.5 percent for fiscal 2020 from an earlier estimate of 1.6 percent. Regarding GDP growth, the central bank expects the economy to have grown by 0.9 percent in fiscal 2018, less than a 1.4 percent expansion previously estimated. For fiscal 2019, the GDP is estimated to grow by 0.9 percent, slightly faster than a 0.8 percent expansion in an earlier projection. In fiscal 2020, the GDP is expected to advance 1 percent, stronger than a 0.8 percent growth previously estimated.

With regard to the amount of JGBs to be purchased, the bank will conduct buying at more or less the current pace -- an annual pace of increase of about 80 trillion yen.

The BoJ also determined by an unanimous vote to purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at an annual paces of about JPY 6.0 trillion and about JPY 90 billion, respectively. With a view to lowering risk premia of asset prices in an appropriate manner, the bank may increase or decrease the amount of purchases depending on market conditions. As for CP and corporate bonds, the bank will maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen, respectively.

Excerpts from the Outlook for Economic Activity and Prices:

Japan's economy is likely to continued on an expanding trend, mainly against the background of highly accommodative financial conditions and the underpinnings through government spending, with overseas economies continuing to grow firmly on the whole, despite being affected by a cyclical slowdown in business fixed investment and the scheduled consumption tax hike in October 2019.

The year-on-year rate of change in the consumer price index (CPI, all items less fresh food) has been positive but has continued to show relatively weak developments compared to the economic expansion and the labor market tightening. This is mainly attributable to (1) such fastors as firms' cautious wage-and price-setting stance not having changed clearly yet in a sitiation where the mindset and behaviour based on the assumption that wages and prices will not increase easily have been deeply entrenched and (2) firms moves toward raising productivity as well as the technological progress in recenr years. While it has been taking time to resolve these factors that have been delaying price rises, medium-to long-term inflation expectations have been more or less unchanged. Nonetheless, with the output gap remaining positive, firms; stance gradually will shift toward further raising wages and prices and households' tolerance of price rises will increase. In this situation, further price rises are likely to be observed widely and then medium-to long-term inflation expectations are projected to rise gradually. As a consequence, the year-on-year of change in the CPI is likely to increase gradually toward 2 percent.

With regard to the risks balance, risks to both economic activity and prices were skewed to the downside. On the price front, the momentum toward achieving the price stability target of 2 percent is maintained but is not yet suffficiently firm, and developments in prices continue to warrant careful attention. 

BoJ Holds Policy Steady, Lowers Inflation Forecasts


Bank of Japan | Rida Husna | rida@tradingeconomics.com
1/23/2019 10:33:39 AM