BOJ Maintains Stimulus as Inflation Lags Behind Growth

Updated on
  • Focus turns to chance of policy normalization starting in 2018
  • Kuroda pushes back against speculation about ‘reversal rate’
Masaaki Kanno, chief economist at Sony Financial Holdings, discusses the Bank of Japan’s policy decision.

The Bank of Japan left policy settings unchanged in the final meeting of 2017, retaining its unprecedented monetary stimulus as it waits for a pickup in stubbornly low inflation.

With Japan’s economy continuing to grow at a healthy pace, and inflation at least moving in the right direction, there is little pressure on the BOJ adjust its interest-rate and asset-purchase targets any time soon. This sets it apart from its global counterparts, with the Federal Reserve hiking interest rates and the European Central Bank moving closer toward policy normalization.

Economists and investors are looking further ahead, with some speculating that the BOJ will follow some of its peers next year. While all 44 analysts surveyed by Bloomberg ahead of Thursday’s policy meeting expected no change this month, 19 forecast tightening in 2018.

Read more: Japan’s economy expands more than expected.

"Next year, if the current economic growth trend continues then there should be ever increasing expectations for monetary policy normalization," said Junko Nishioka, chief economist at Sumitomo Mitsui Banking Corporation and a former BOJ official.

Reversal Rate

Governor Haruhiko Kuroda said at a press briefing that the central bank didn’t need to reconsider its current policy framework. 

His comments last month on the "reversal rate” theory stoked speculation about an earlier policy exit. The theory posits that monetary stimulus could end up hurting commercial banks’ profitability, making them less likely to lend. 

Kuroda said Thursday that financial intermediation hasn’t been impaired in Japan and that talk about the theory doesn’t indicate any need for policy change. The yen weakened following the comments and traded at 113.57 per dollar at 5:12 p.m. in Tokyo.

Inside story: BOJ is Said to Tweak Message as Dissenter Calls for More Easing

"Just because I brought up this academic analysis, reversal rate, doesn’t mean at all that we need to review or change the yield curve control we’ve adopted since September last year,” Kuroda said.

The BOJ board’s vote was 8-1 on policy rates and unanimous on asset purchases. Goushi Kataoka, who joined the board in July, dissented on the policy rates.

The BOJ hasn’t altered its policy framework since September 2016, when it implemented its yield-curve control program, setting an interest rate of -0.1 percent on some bank reserves and a target of around 0 percent for 10-year government bond yields. It also continues to buy enormous amounts of assets, mostly Japanese government bonds.

In a sign of how little pressure Kuroda faces to take additional action, he has been called to parliament only 19 days this year. That’s down from 51 days last year and is the fewest for any BOJ governor since 2007.

Click here to see economist forecasts for BOJ policy.

Japan’s economy is now in the longest expansion in more than two decades. Gross domestic product grew 2.5 percent in the third quarter, while confidence among large manufacturers rose to the highest level since the global financial crisis. Even so, prices excluding fresh food rose only 0.8 percent in October, well below the BOJ’s target.

In its statement Thursday, the BOJ offered a slightly more upbeat view of business investment and private consumption, and noted steady improvement in employment and incomes, but also said inflation expectations remain in "a weakening phase."

"The BOJ is gaining confidence in the strength of the economic recovery and tweaking the language of its assessment of economic conditions to indicate their optimism," said Maiko Noguchi, a senior economist at Daiwa Securities and a former BOJ official. "But it’s too early to think that optimism will lead to a policy change soon as their view on inflation hasn’t changed at all."

What our economist says ...

"Japan’s economy on its best run in years -- with growth above potential -- suggests the BOJ’s policy framework is producing some results, though inflation remains far from its 2 percent target. ...  Bloomberg Economics’ view is that inflation is likely to creep marginally higher next year, opening up room for the BOJ to adjust its policy settings toward a slightly steeper yield curve."

--Yuki Masujima, Bloomberg Economics
For more, see his JAPAN REACT.

Defeating Deflation

The economy’s performance has also raised the prospect that the government will declare sometime next year that deflation has been finally defeated. Kuroda said Thursday the BOJ won’t raise rates just because the economy is good, and stands ready to implement additional easing if price momentum is weak.

"It’s possible that the government will use its judgment and declare an exit from deflation, and that may have a good effect on eradicating the deflationary mindset," he said. "But as far as we are concerned, as I’ve said before, we are committed to achieving the 2 percent price target as soon as possible and will continue monetary easing tenaciously.”

— With assistance by Yoshiaki Nohara, Yuko Takeo, Connor Cislo, James Mayger, Kazunori Takada, Shoko Oda, and Gearoid Reidy

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