Japan’s Central Bank Stands Pat as Risks Rise in Long Battle to Stoke Inflation
(Bloomberg) -- The Bank of Japan stayed the course on monetary stimulus while confirming in updated forecasts that it won’t meet its inflation target for years to come.
The central bank left its policy interest rates and asset-purchase targets unchanged, while forecasting that inflation will remain below its 2 percent target until at least early 2021. This will leave it even further behind its peers in shifting away from crisis-era monetary policies, as the Federal Reserve raises interest rates and the European Central Bank halts bond purchases.
With a long road still ahead for the BOJ, and few tools left at its disposal, the focus has turned to the sustainability of its policy and risks to the economy, particularly an escalating U.S.-China trade war and the accumulating side effects of its policies at home.
"The BOJ is in a extremely tough situation," said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group. "They had to downgrade inflation projections to show they are even further from the price target. At the same time, they are admitting rising risks for the economy because of the continuing trade war, China’s slowdown and weakness in emerging economies."
The BOJ said risks in the current fiscal year ending in March are now skewed to the downside, compared with “generally balanced” previously. That same assessment holds through fiscal 2020.
Governor Haruhiko Kuroda said the central bank is looking closely at how the U.S-China trade conflict might affect the global and Japanese economies, but noted that any impact on inflation and economic growth in Japan has yet to materialize.
"If major downside risks actually emerge, and begin to have a large effect on economic and price outlooks, I think we will adjust monetary policy itself," Kuroda said, citing lowering yields and expanding asset purchases as options. "But right now we’re not in that kind of situation."
What our economist says ...
|"The BOJ will need to maintain its extreme stimulus for the foreseeable future, given the failure of inflation to gain much traction," said Bloomberg Economics’ Yuki Masujima. "At the same time, financial imbalances -- the BOJ’s ballooning balance sheet, a distorted JGB market, and strains on regional bank profitability -- are increasing."|
For more, see Masujima’s JAPAN REACT.
Addressing policy side effects at home, Kuroda said government bond market functioning had improved since the BOJ’s policy tweaks in July. He said the central bank would continue taking needed steps to help the market function, but that it isn’t considering changing the zero percent target for 10-year bond yields, or widening the permitted trading range.
In a separate statement later in the day, the BOJ tweaked its monthly bond-buying plan for a third time in a row, keeping traders on their toes, as it seeks to boost activity in the world’s second-largest debt market.
It reduced the number of days on which it would buy bonds in the one-to-five year maturities by one, while increasing the amount that it could possibly purchase at each operation.
The BOJ added language to its quarterly outlook report about the need to "pay close attention" to risks to regional bank profitability, while also saying those risks are not currently significant thanks to sufficient capital bases. It had pointed to weakening bank profitability in its semi-annual financial system report last week, expressing concern that an external shock could cause banks to pull back from lending more than usual, hurting the economy.
Kuroda stressed that bank profitability wasn’t an immediate problem.
In its outlook report, the central bank also trimmed its inflation forecasts for the current and next two fiscal years, while reiterating that it expects inflation to continue rising gradually toward 2 percent. It sees core inflation of 1.5 percent in fiscal 2020.
- The BOJ pledges to keep interest rates extremely low for an extended period of time.
- It imposes an interest rate of minus 0.1 percent on some of the reserves financial institutions keep at the central bank.
- It targets a yield of about 0 percent for 10-year Japanese government bonds, while allowing a trading range of about 0.2 percent either side of the mark.
- It has a guideline for increasing JGB holdings by about 80 trillion yen a year. (This is secondary to yield-curve control and actual purchases have dropped to about half the guideline.)
- It has a guideline for increasing holdings of exchange-traded funds by 6 trillion yen a year. (The actual level of purchases has varied greatly from month to month, depending on market conditions.)
©2018 Bloomberg L.P.