BoJ Holds Rates, Revises Forward Guidance

The Bank of Japan left its key short-term interest rate unchanged at -0.1 percent at its April meeting and kept the target for the 10-year government bond yield at around zero percent, as widely expected. The Committee said it intends to keep the current extremely low levels of short-term and long-term interest rates for an extended period of time, at least through around Spring 2020, taking into account uncertainties regarding economic activity and prices including developments in overseas economies and the effects of the scheduled consumption tax hike.

The Bank of Japan previously committed to hold low rates for an extended period but it had not specified any time frame.

In addition, the central bank said it would examine uncertainties regarding economic activities and prices including the effects of the scheduled consumption tax hike and development in overseas economies. By continuing with powerful monetary easing and maintaining the output gap within positive territory, the bank will aim to achieve the price stability ratget at the earliest possible time, while securing stability in economic and financial conditions.

With regard to the amount of JGBs to be purchased, the bank will conduct buying at more or less the current pace -- an annual pace of increase of about 80 trillion yen.

The BoJ also determined by an unanimous vote to purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at an annual paces of about JPY 6.0 trillion and about JPY 90 billion, respectively. With a view to lowering risk premia of asset prices in an appropriate manner, the bank may increase or decrease the amount of purchases depending on market conditions. As for CP and corporate bonds, the bank will maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen, respectively.

Excerpts from the Outlook for Economic Activity and Prices:

Japan's economy is likely to continued on an expanding trend through fiscal 2021 despite being affected by the slowdown in overseas economies for the time being. Although exports are prejected to show some weakness for the time being, they are expected to be on a moderate increasing trend, with overseas economies growing moderately on the whole. Domestic demand also is likely to follow an uptrend, mainly against the background of highly accommodative financial conditions and the underpinnings through government spending, despite being affected by such factors as the scheduled consumption tax hike.

The year-on-year rate of change in the consumer price index (CPI, all items less fresh food) has been positive but has continued to show relatively weak developments compared to the economic expansion and the labor market tightening. This is mainly attributable to (1) such fastors as firms' cautious wage-and price-setting stance not having changed clearly yet in a sitiation where the mindset and behaviour based on the assumption that wages and prices will not increase easily have been deeply entrenched and (2) firms moves toward raising productivity as well as the technological progress in recenr years. While it has been taking time to resolve these factors that have been delaying price rises, medium-to long-term inflation expectations have been more or less unchanged. Nonetheless, with the output gap remaining positive, firms; stance gradually will shift toward further raising wages and prices and households' tolerance of price rises will increase. In this situation, further price rises are likely to be observed widely and then medium-to long-term inflation expectations are projected to rise gradually. As a consequence, the year-on-year of change in the CPI is likely to increase gradually toward 2 percent.

With regard to the risks balance, risks to both economic activity and prices were skewed to the downside. On the price front, the momentum toward achieving the price stability target of 2 percent is maintained but is not yet suffficiently firm, and developments in prices continue to warrant careful attention. 

BoJ Holds Rates, Revises Forward Guidance

Bank of Japan l Rida Husna |
4/25/2019 12:25:38 PM