A pedestrian walks past the Bank of Japan (BOJ) headquarters in Tokyo, Japan. (Photographer: Akio Kon/Bloomberg)

BOJ Keeps Policy Unchanged After Fed Adds Dovish Tint to Outlook

(Bloomberg) -- The Bank of Japan left its stimulus settings unchanged at its final policy meeting of the year in the face of rising risks to inflation, just hours after the Federal Reserve signaled a slightly more dovish rate path.

The BOJ kept its yield curve-control program and asset purchases unchanged, it said in a statement Thursday, a result predicted by all 49 economists surveyed by Bloomberg.

The central bank faces a deteriorating environment. With oil prices tumbling, economists see inflation falling toward zero in the year ahead. Slowing growth in China, the U.S.-China trade war and a disruptive Brexit could all hit Japan’s export-dependent economy, which has contracted in two of the past three quarters.

Governor Haruhiko Kuroda acknowledged that risks tilted to the downside, while arguing that Japan’s economic fundamentals remain solid and momentum toward the 2 percent price target is maintained.

Speaking at a press conference later, Kuroda also said the BOJ has more tools for adding stimulus if needed -- including rate cuts and asset purchases -- and that it’s no problem if government bond yields fall into negative territory, so long as the move reflects economic fundamentals and yields remain within the BOJ’s target range.

Japanese stocks entered a bear market on Thursday, with the Topix index falling another 2.5 percent as statements from the BOJ and Fed failed to soothe investors. Benchmark 10-year bond yields this week fell to 0.01 percent, the lowest since September 2017.

While the BOJ officials may be fine with yields hitting zero percent or below, sub-zero yields for an extended period would again elevate concerns about profits at Japanese banks. Eroded bank profitability was a key reason the BOJ introduced yield curve control in 2016.

BOJ Keeps Policy Unchanged After Fed Adds Dovish Tint to Outlook

The BOJ repeated its previous assessment that Japan’s economy is likely to continue expanding moderately, supported by moderate growth in exports and an uptrend in domestic demand. Core inflation is currently around 1 percent, and likely to increase gradually toward 2 percent, it said.

"With a rising level of cautiousness, which was shared by the Fed, the BOJ will be in wait-and-see mode for a while," said Junko Nishioka, chief Japan economist at Sumitomo Mitsui Banking Corp. and a former BOJ official. "They are well aware that it’s not time to signal any policy normalization."

The vote on the rate decision was 7-2, with Goushi Kataoka and Yutaka Harada dissenting. Kataoka again argued that heightening uncertainties regarding economic activity and prices warranted action to push long-term yields lower. Harada said the trading range for yields was too ambiguous a guide for market operations.

After more than five years and $3.5 trillion of asset purchases, inflation remains only halfway to the BOJ’s goal, as wage growth remains stubbornly sluggish.

What Our Economist Says ...

“The key point in its statement appears to be a slightly less upbeat take on corporate profits and sentiment," Bloomberg Economics’ Yuki Masujima wrote. "This is hardly alarming, considering all the headwinds from the U.S. protectionism and China’s slowdown. But given that Japan Inc. has been the main driver of the economy, it’s something to keep an eye on.” 

The Fed’s more cautious stance on future rate increases will complicate matters for the BOJ, which must be mindful that any clear signal of policy normalization, particularly if the Fed seems poised to hit pause, could cause the yen to quickly gain unwanted strength.

Compared with October, fewer economists now expect tightening of policy next year, the Bloomberg survey found.

Policy Recap

Key elements of the BOJ’s yield-curve control policy:

  • Interest rate of minus 0.1 percent charged on some of the reserves financial institutions keep at the BOJ.
  • Yield target of about 0 percent for 10-year Japanese government bonds, while allowing a trading range of around 0.2 percent either side of the mark.
  • BOJ pledges to keep interest rates extremely low for an extended period of time.
  • Increase JGB holdings by about 80 trillion yen a year. (Actual purchases are far below this.)
  • Increase holdings of exchange-traded funds by 6 trillion yen a year.

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