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 expanding moderately, with a virtuous cycle from income to spending operating. Overseas economies have continued to grow firmly on the whole. In this situation, exports have been on an increasing trend. On the domestic demand side, business fixed 2 investment has continued on an increasing trend with corporate profits and business sentiment improving. Private consumption has been increasing moderately, albeit with fluctuations, against the background of steady improvement in the employment and income situation. Housing investment has been weakening somewhat. Meanwhile, public investment has been more or less flat, remaining at a relatively high level. Reflecting these increases in demand both at home and abroad, industrial production has been on an increasing trend, and labor market conditions have continued to tighten steadily. Financial conditions are highly accommodative. On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) is around 1 percent. Inflation expectations have been more or less unchanged. (Mild hawkish bias)
• With regard to the outlook, Japan's economy is likely to continue its moderate expansion. Domestic demand is likely to follow an uptrend, with a virtuous cycle from income to spending being maintained in both the corporate and household sectors, on the back of highly accommodative financial conditions and underpinnings through the government's past stimulus measures. Exports are expected to continue their moderate increasing trend on the back of the firm growth in overseas economies. The year-on-year rate of change in the CPI is likely to continue on an uptrend and increase toward 2 percent, mainly on the back of an improvement in the output gap and a rise in medium- to long-term inflation expectations. (Neutral bias)
• Risks to the outlook include the following: the U.S. economic policies and their impact on global financial markets; developments in emerging and commodity-exporting economies; negotiations on the United Kingdom's exit from the European Union (EU) and their effects; and geopolitical risks.  (Neutral bias)
• BoJ says that it would continue with its monetary policy unless inflation exceeds 2 percent objective remains above the level in a stable manner. The bank would do adjustments as necessary. (Neutral bias)

The Bank of Japan’s (BoJ) monetary policy statement remains broadly balanced and neutral, however, it is slightly hawkish tilted compared to previous statements. The Japanese yen is currently trading at 106.8 per dollar and Nikkei at 21670.