BOJ monetary policy: Assessing future bias

At today’s meeting, policymakers at the Bank of Japan (BoJ) kept the policy unchanged, and the benchmark interest rate at -0.1 percent in 7-2 votes.

Let’s look at the current monetary policies,

• Bank of Japan had already shifted the timeline for reaching the 2 percent inflation goal to “earliest possible time” and with that view, it had introduced QQE with yield curve control. It means that the bank would guide both short term and long term rates while purchasing assets at the pace of ¥80 trillion per annum until the inflation overshoots the 2 percent target and stays above.
• For short term rate controls, BoJ will maintain a negative interest rate of -0.1 percent and for the long term rate control, it would purchase assets in such a manner that the 10-year yield remains around zero percent.
• In addition to that, BoJ would use fixed-rate purchases of JGBs and fixed-rate funds supplying for a period up to 10 years.
• The bank will continue to purchase ETFs at ¥6 trillion per annum and J-REITs at ¥90 billion per annum. CPs will be maintained at ¥2.2 trillion and corporate bonds at ¥3.2 trillion.

Key takeaways from the economic outlook -

• Japan's economy is likely to continue on an expanding trend throughout the projection period -- that is, through fiscal 2021 -- despite being affected by the slowdown in overseas economies for the time being.2 Although exports are projected to show some weakness for the time being, they are expected to be on a moderate increasing trend, with overseas economies growing moderately on the whole. Domestic demand also is likely to follow an uptrend, mainly against the background of highly accommodative financial conditions and the underpinnings through government spending, despite being affected by such factors as the scheduled consumption tax hike. (Neutral bias)
• 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 tight labor market conditions. 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 rate of change in the CPI is likely to increase gradually toward 2 percent. Comparing the current projections with the previous ones, both the projected growth rates and the projected rates of increase in the CPI are more or less unchanged. (Neutral bias)
• Risks to the outlook include the following: the U.S. macroeconomic policies and their impact on global financial markets; the consequences of protectionist moves and their effects; developments in emerging and commodity-exporting economies such as China, including the effects of the two aforementioned factors; developments in global adjustments in IT-related goods; negotiations on the United Kingdom's exit from the European Union (EU) and their effects; and geopolitical risks. Downside risks concerning overseas economies are likely to be 3 significant, and it also is necessary to pay close attention to their impact on firms' and households' sentiment in Japan.  (Neutral bias)
• With regard to the risk balance, risks to economic activity are skewed to the downside, particularly regarding developments in overseas economies. Risks to prices are skewed to the downside, mainly due to the downside risks to economic activity and uncertainties over developments in medium- to long-term inflation expectations. The momentum toward achieving the price stability target of 2 percent is maintained but is not yet sufficiently firm, and thus developments in prices continue to warrant careful attention. (Dovish bias)

The Bank of Japan’s (BoJ) monetary policy statement remains broadly balanced and neutral, however, it is slightly dovish tilted compared to previous statements. The Japanese yen is currently trading at 108.6 per dollar and Nikkei at 21710.