BoJ Introduces More Policy Flexibility


The Bank of Japan left its key short-term interest rate unchanged at -0.1 percent and vowed to keep rates extremely low for an extended period of time at its July 2018 meeting. The central bank reinforced its commitment to continue with powerful monetary easing, defying speculations of a tight regime. At the same time, the central bank kept its 10-year government bond yield target at around 0 percent but said the yield could fluctuate depending on economic and price developments. The 10-year yield will now rise up to around 0.20 percent, from around 0.10 percent before. Policymakers also opted for flexible bond buying, saying they may increase or decrease the amount of purchases depending on market conditions.

The central bank intended to maintain the current extremely low levels of short-and long-term iterest rates for an extended period of time, taking into account uncertainties regarding economic activity and prices including the effects of the consumption tax hikes scheduled to take place in October 2019.

With regard to the amount of JGBs to be purchased, the BoJ 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 trillion and about JPY 90 billion, respectively. With a view to lowering risk premia of asset prices in an appropriate manner, tha bank may increase or decrease the amount of purchase 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.  

In addition, under the condition that yield curve control can be conducted appropriately, the bank will reduce the size of the Policy-Rate Balance in financial institutions' current account balances at the bank. This balance is calculated assuming that arbitrage transactions take place in full among financial institutions. Regarding the amount of each ETF to be purchased, the bank will revise the purchase amount of each ETF and increase that ETF's which track the Tokyo Stock Price Index (TOPIX).

Meanwhile in a quarterly review of the central bank's forecasts, the BOJ said medium-to-long-term inflation expectations are projected to rise gradually as firms' stance gradually shifts toward further raising wages and prices with the output gap remaining positive. As a consequence, the year-on-year rate of change in the CPI is likely to increase gradually toward 2 percent, although it will take more time than expected. For fiscal 2018, core CPI is projected to rise by 1.1 percent, down from an earlier forecast of 1.3 percent. At the same time, the economy is expected to expand by 1.5 percent, more or less unchanged from  a 1.6 percent expansion in the previous estimate.

Excerpts from the Outlook for Economic Activity and Prices:

Japan's economy is likely to continue at a pace above its potential in fiscal 2018, mainly against the background of highly accommmodative financial conditions and the underpinning through government spending, with overseas economied continuing to grow firmly. From fuscal 2019 through fiscal 2010, the economy is expected to continue on an expanding trend, partly supported by external demand, although the growth pace is projected to decelerate due to a cyclical slowdown in business fixed investment and the effects of the scheduled consumption tax hike.

With regard to the risk balance, upside and downside risks to economic activity are generally balanced in fiscal 2018, but skewed to the downside for fiscal 2019 onward.

BoJ Introduces More Policy Flexibility


Bank of Japan l Rida | rida@tradingeconomics.com
7/31/2018 10:35:52 AM