Bank of Japan Forgoes Additional Easing, Betting Economy Will Turn Around

Updated on
  • Kuroda stands pat ahead of Federal Reserve's meeting
  • Economists see increasing chance of move at end October

The Bank of Japan refrained from boosting stimulus even after the economy shrank last quarter, betting that a resumption in growth will be enough to rekindle inflation.

The move by Governor Haruhiko Kuroda and his colleagues leaves the onus on Prime Minister Shinzo Abe’s government to compile a stimulus package to boost what evidence indicates is a lackluster recovery in the second half of the year so far.

Haruhiko Kuroda

Photographer: Kiyoshi Ota/Bloomberg

Kuroda repeatedly told reporters on Tuesday that the bank sees a gradual recovery continuing in the economy, while also saying the bank wouldn’t hesitate to ease if there was some danger of prices not rising to its target. With the BOJ’s inflation gauge at zero, some officials at the bank see a growing chance of another delay in reaching their 2 percent price target. Economists from Goldman Sachs Group Inc. and Citigroup Inc. are among those who project a boost in stimulus on Oct. 30.

“If the downside risks worsen the BOJ will need to take action,” said Yasuhiro Takahashi, an economist at Nomura Holdings Inc. who forecasts further stimulus in April. “The BOJ had been optimistic about the outlook for Japan’s economy but in today’s statement it lowered its view on exports and production.”

The central bank will keep increasing the monetary base at an annual pace of 80 trillion yen ($666 billion), it said in a statement on Tuesday, as forecast by 33 of 35 economists surveyed by Bloomberg. The other two predicted a boost.

Yen Strengthens

The yen strengthened 0.6 percent to 119.50 against the dollar at 5:31 p.m. in Tokyo while the Topix stock index gave up earlier gains to close almost unchanged for the day. The currency has weakened almost 9 percent since the BOJ last expanded on its program in October 2014 while the stock gauge has climbed 14 percent.

Production, household spending and orders for machinery -- a leading indicator of capital spending -- all unexpectedly fell in July, highlighting weakness after gross domestic product contracted last quarter.

The economy will probably return to growth in the July-September period, Kuroda said at a press conference after the policy decision, adding that it was necessary to take into account the considerable expansion in the first quarter when looking at the contraction in the April-June period, which he attributed to temporary factors such as bad weather and a substantial drop in exports. 

While Kuroda has signaled the possibility that the BOJ may lower its inflation outlook due to the drop in oil prices, he said Tuesday that inflation would accelerate to the 2 percent goal around the six months through September 2016.

“When you look at various indicators that capture the expected rate of price
gains, they are flat overall,” although they are in an upward trend over the longer term, Kuroda said. “Wages, including base wages, continue to rise. This reflects the very tight labor market and record corporate earnings," but also companies are raising wages with the outlook for prices in mind, he said.

By some measures, the BOJ is making headway on inflation. A gauge that strips out fresh food and energy shows consumer prices rising 0.9 percent in July after gains of 0.7 percent in the prior two months, according to people familiar with the discussions who asked not to be named.

Economists’ Doubts

Still, no economist in the Bloomberg survey sees price gains reaching the target in the BOJ’s current time frame. When Kuroda launched the asset-purchase program in April 2013, he said inflation would reach the target in around two years. He pushed back the timing in April this year, as declines in energy prices dragged down inflation.

Eleven economists in the poll predicted the expansion of stimulus on Oct. 30, when the BOJ releases its economic and inflation outlook. That meeting would be a "good opportunity" to add stimulus, ruling party lawmaker Kozo Yamamoto said in an interview last week. He said the BOJ should expand its easing plan by at least 10 trillion yen.

The central bank has been buying government bonds and assets linked to stocks and real estate to pump cash into the economy. With the BOJ having purchased 79 percent of the targeted amount of exchange traded funds for this year, it may need to add to its firepower.

“They’ve only got a little bit left in their quota,” Seiji Arai, a strategist at Mitsubishi UFJ Morgan Stanley Securities, said before Tuesday’s decision. “I think they’ll vow to increase yearly purchases by 1 or 2 trillion yen in October.”