The Bank of Japan has no preset idea on whether to ease monetary policy when it meets next month, but policymakers are more keen to act than before since overseas risks are heightening, Governor Haruhiko Kuroda said in a speech at a meeting with business leaders in Osaka. Still, any decision would depend on financial markets movements and risks regarding overseas economy, he added, with possible measures for monetary easing including cutting the short-term policy interest rate, lowering the target level of 10-year Japanese government bond (JGB) yields, expanding asset purchases, and accelerating the expansion of the monetary base.
Excerpts from the speech at a Meeting with Business Leaders in Osaka:
The Bank of Japan has the same policy stance, in that preventing and insuring against risks are taken into consideration when conducting monetary policy. In doing so, what is essential for the Bank is assessment of the momentum toward achieving the price stability target of 2 percent. If there is a greater possibility that such momentum will be lost, the Bank will not hesitate to take additional easing measures. While various factors are considered when examining the momentum toward achieving the price stability target, the following two points are particularly important. First is whether the positive output gap, or the high level of economic activity, will be maintained, and whether firms' stance will shift toward further raising wages and prices under such situation. Second is developments in medium- to long-term inflation expectations of firms and households. Based on these points, the Bank deems that the momentum toward achieving the price stability target has been maintained so far. With the output gap remaining positive, moves to raise selling prices reflecting cost increases have been observed recently in a wide range of firms. As for the outlook, inflation expectations are projected to rise as many of the factors that have been delaying inflation will be resolved gradually and moves to raise prices will spread widely. Under these circumstances, the year-on-year rate of change in the CPI is likely to increase gradually toward 2 percent. Thus, the Bank judges it appropriate to continue with the current monetary policy.
However, given that slowdowns in overseas economies have continued to be observed and their downside risks seem to be increasing, it is becoming necessary to pay closer attention to the possibility that the momentum toward achieving the price stability target will be lost. Developments in the output gap warrant particular attention. If downside risks to overseas economies materialize, there is a possibility that the growth rate of Japan's economy will decelerate substantially through, for example, the prolonged weak exports and firms' investment stance becoming cautious. If this happens, the momentum toward achieving the price stability target could be affected through shrinkage of the output gap. Attention also should be paid to the fact that the impact of the so-called adaptive formation mechanism is large in Japan, in which the actual inflation rate affects inflation expectations. Although crude oil prices temporarily rose somewhat due to increased geopolitical risks, they have declined to some extent from a somewhat longer-term perspective, mainly against the background of the slowdown in overseas economies. If crude oil prices decline further and the actual inflation rate decreases clearly, inflation expectations also may be affected.
Considering that it is becoming necessary to pay closer attention to the possibility that the momentum toward achieving the price stability target will be lost, the Bank will thoroughly reexamine economic and price developments at the next MPM, when it releases the Outlook Report. It will examine economic and price developments from a broad perspective at the next MPM, based on observations that will be available by the time of the meeting, such as various economic indicators, the reports at the meeting of general managers of the Bank's branches, and developments in financial markets. Recently, the situation has been changing rapidly, with investors' risk aversion abating somewhat due to expectations for progress in U.S.-China trade negotiations. Let me also add that the Bank does not have any preconception at this point regarding the outcome of its examination.
9/24/2019 10:00:12 AM