BoJ keeps policy on hold, revises down forecast for CPI and GDP growth

Japan’s central bank today kept its policy on hold, as opposed to consensus projections of easing. BoJ kept the monetary base target at JPY 80 trillion per year and also kept the ETF and J-REIT purchases target unchanged at JPY3.3trn/year, and JPY90bn/year, respectively. Interest rate on the policy-rate balance in current accounts were kept on hold at -0.1%.

There was a strong case for easing as core inflation measures are turning over, economic growth has been sluggish and inflation expectations have declined further recently, according to HSBC. Admittedly, the BoJ’s policy board revised down its macro forecasts again today.

The central bank now expects CPI excluding fresh food to reach 0.5% in FY 2016, as compared with earlier forecast of 0.8%. CPI is forecast to reach 1.7% and 1.9% in FY17 and FY18 respectively. Meanwhile, Japan’s real GDP for FY 2016 is likely to grow 1.2%, as compared with the earlier projection of 1.5%. The economy is expected to expand 0.1% in FY17 and 1% in FY18.

The BoJ also extended the timeframe of the inflation target of 2% by further six months to “during FY2017” The central bank had stated earlier that it will attain 2% inflation target by H1 FY2017. The policy board stated that there are quite high risks on the downside for the inflation outlook and that it sees “large downside risks for the economic outlook” also.

The BoJ is expected to have kept its policy unchanged due to a certain combination of factors such as: the nation’s risk assets had rallied hard before the meeting, increasing the bar for an upside surprise; and also that the BoJ intends to wait for additional lucidity on the fiscal policy moves by the government before easing further, according to HSBC. Hence, the central bank is still expected to expand its policy and there is a possibility of BoJ providing additional stimulus during its June meeting, added HSBC.