Photographer: Akio Kon/Bloomberg

BOJ Keeps Stimulus Unchanged as It Trims Inflation Outlook

Updated on
  • Board trims CPI forecasts for current and next fiscal years
  • New member Kataoka dissents again, offers aggressive ideas

The Bank of Japan left its massive monetary stimulus program unchanged even as it trimmed its inflation forecasts, signaling further divergence ahead from its global peers.

Governor Haruhiko Kuroda and the board voted on Tuesday to maintain the central bank’s yield curve control program and asset purchases, a result predicted by all 43 economists surveyed by Bloomberg. The vote was 8-1, with new board member Goushi Kataoka dissenting.

The BOJ is under little pressure to take additional action even though inflation is well below its 2 percent target. Japan’s economy is on track for the longest expansion in 16 years, stocks are at the highest level in two decades and the labor market is the tightest in a generation. 

Prime Minister Shinzo Abe’s election win this month has raised expectations that the central bank’s current policy stance will continue, making any turn toward the exit even trickier, according to former board member Sayuri Shirai.

‘Long-Term Battle’

"They have determined this is a long-term battle and they won’t ease policy further unless something drastic happens," said Masaki Kuwahara, senior economist at Nomura Securities Co., adding that the BOJ will continue to cut its inflation forecasts even if it "looks bad."

The nine-member board maintained its view that its 2 percent target is likely to be met around the fiscal year that starts in April 2019. The BOJ’s key inflation gauge, which strips out fresh food, rose 0.7 percent in September.

Kuroda has stressed the importance of continuing monetary easing even as the BOJ lags behind its counterparts in turning toward policy normalization. The European Central Bank unveiled a plan to reduce bond purchases last week and investors see more than an 80 percent chance of another rate hike by the Federal Reserve in December.

With the BOJ still far from its price target, there was no need to adjust its stimulus program, Kuroda said during a news conference. He rejected the notion that the BOJ should discuss how it would exit its policy framework in the future, saying that doing so would be "misleading" and negative for markets.

"It’s important to conduct suitable communication at the right time, but now is not that time," Kuroda said. "When we are at a stage when we are about to shift our policy or are headed toward an exit, I would like to conduct communication and discussions that are grounded on actual circumstances."

Market Reaction

Japan’s Nikkei 225 stock index ended the day barely lower after closing Monday at the highest level in two decades. The yen weakened in the minutes after the BOJ’s decision was announced, but later strengthened before trading little-changed on the day at 113.09 versus the dollar as of 5:19 p.m. in Tokyo.

With Japanese stocks on a historic winning streak this month, Kuroda was asked during his news conference whether the BOJ needed to continue its purchases of exchange-traded funds. The BOJ has faced criticism over its ETF buying, with investors and some regulators saying it risked distorting the market in some companies’ equities, a concern shared even by some BOJ officials. A recent decline in its buying has prompted speculation that it intended to cut back.

Kuroda said the BOJ’s purchases were not meant to achieve a specific level for stock prices, which are rising due to expectations for better profits, but to lower risk premiums. There was no specific timing to its purchases, he said. "It’s possible that the actual amount purchased will change according to the market situation," he said.

Difference of Opinions

Kataoka, a reflationist who joined the board in July, said at Tuesday’s meeting that it would be appropriate for the BOJ to buy Japanese government bonds so that the 15-year yield would remain under 0.2 percent. To reinforce the inflation overshooting commitment, he suggested that if there were a delay in reaching the price target due to domestic factors, the BOJ should take additional easing.

Kataoka’s dissenting votes are unlikely to shift the BOJ’s course, said Takahiro Sekido, a former BOJ official who is now a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo. Sekido described Kataoka’s suggestion to target 15-year JGB yields as "hard to understand" and not clearly a better alternative.

Click here to read more about Kataoka

The latest fiscal year forecasts from the BOJ are:

  • 2017 core inflation of 0.8%; down from previous forecast of 1.1%
  • 2018 core inflation of 1.4%; down from previous forecast of 1.5%
  • 2019 core inflation of 1.8%; unchanged from previous forecast*
  • 2017 gross domestic product of 1.9%; up from previous forecast of 1.8%
  • 2018 gross domestic product of 1.4%; unchanged from previous forecast
  • 2019 gross domestic product of 0.7%; unchanged from previous forecast

* Note: 2019 forecast strips out the projected impact of a sales-tax hike scheduled for October that year.

— With assistance by Connor Cislo, Yuko Takeo, Yoshiaki Nohara, Kazunori Takada, Andy Sharp, Russell Ward, Keiko Ujikane, Gearoid Reidy, and Go Onomitsu

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