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 8-1 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 expanding on the back of highly accommodative financial conditions and underpinnings through the government's past stimulus measures, with overseas economies continuing to grow at a moderate pace, and maintain growth at a pace above its potential mainly through fiscal 2018. In fiscal 2019, the economy is expected to continue expanding, 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. (Neutral bias)
• The consumer price index (CPI, all items less fresh food) has continued to show relatively weak developments, excluding the effects of a rise in energy prices, mainly against the background that firms' wage- and price-setting stance has remained cautious. Nonetheless, medium- to long-term inflation expectations are projected to rise as firms' stance gradually shifts toward raising wages and prices with an improvement in the output gap continuing. As a consequence, the year-on-year rate of change in the CPI is likely to continue on an uptrend and increase toward 2 percent. (Neutral bias)
• With regard to the risk balance, upside and downside risks to economic activity are generally balanced, and risks to prices are skewed to the downside. On the price front, the momentum toward achieving the price stability target of 2 percent is maintained as the output gap is expected to continue improving and medium- to long-term inflation expectations are projected to rise gradually; however, the momentum is not yet sufficiently firm, and thus developments in prices continue to warrant careful attention.  (Neutral bias)
• BoJ says that it would continue with its monetary policy unless inflation reaches 2 percent objective. The bank would do adjustments as necessary. (Neutral bias)

The Bank of Japan’s (BoJ) monetary policy statement remains broadly balanced and neutral, which suggests that the might not signal tapering in the first quarter after all. The Japanese yen is currently trading at 110.5 per dollar and Nikkei at 24124.