The BOJ fine-tuned its monetary policy of controlling the yield curve that has been in place since September 2016 ("Quantitative and Qualitative Easing with Yield Curve Control") by adding "forward guidance" for policy rates in which it said it would maintain the current low levels of short and long-term interest rates "for an extended period of time" and this would take into account the impact on inflation and economic activity of the next round of tax hikes scheduled for October 2019.
"The Bank will continue with QQE with Yield Curve Control," aiming to achieve the price stability target of 2 percent as long as it is necessary to maintaining that target in a stable manner," BOJ said, brushing aside speculation that it may be ready to join the trend of tightening monetary policy in advanced economies.
Prime Minister Shinzo Abe is planning to raise the consumption tax rate to 10 percent from 8 percent next year but the last tax hike in 2014 to the current 8 percent from 5 percent hit consumption hard and led to an economic slump, dealing the BOJ a setback in its aim to boost inflation.
In an update to its economic outlook, the BOJ acknowledged that next year's tax hike, along with a cyclical slowdown in investment, will hit economic growth and it will take longer than expected for inflation to rise toward 2 percent.
"On the price front, the momentum toward achieving the price stability target of 2 percent is maintained but is not yet sufficiently firm, and thus developments in prices continue to warrant careful attention," BOJ said in its outlook.
For fiscal 2018, which began April 1, the BOJ now expects Japan's economy to expand by 1.5 percent on average, down from the previous forecast of 1.6 percent while inflation for all items less fresh food is seen averaging 1.1 percent, down from 1.3 percent.
For fiscal 2019 the economy is forecast to grow by an unchanged 0.8 percent while inflation is seen at 2.0 percent, sharply down from April's forecast of 2.3 percent. Excluding the impact of the tax hike, inflation is seen at 1.5 percent, down from 1.8 percent.
For fiscal 2020, the economy is seen growing by another 0.8 percent, unchanged, but inflation is seen rising 2.1 percent, down from 2.3 percent forecast in April. Excluding the impact of the tax hike, inflation is seen at only 1.6 percent, down from 1.8 percent and thus still below the BOJ's target.
The rise in consumption tax on core inflation is estimated to be about 1 percentage point for October 2019 an onward and then 0.5 percentage point for fiscal 2019 and fiscal 2020.
Although Japan's economy is expected to continue growing above its potential, helped by spending connected to the 2020 Olympics, the BOJ is still facing a challenge in boosting inflation.
The mindset and behavior of Japanese households and firms still reflects the crises in the late 1990s and the widespread assumption that wages and prices will not rise is deeply entrenched and embedded in the economy.
BOJ strategy is to keep the output gap positive so firms gradually shift toward raising wages and prices and this then slowly leads to a rise in inflation expectations, essentially the same aim it has had since 2013 when it first embarked on Quantitative and Qualitative Easing (QQE).
Japan's Gross Domestic Product shrank by 0.2 percent in the first calendar quarter, the first quarterly contraction in 8 quarters, but grew by 1.1 percent year-on-year. Core inflation, which excludes fresh food, rose to 0.8 percent in June from 0.7 percent in the previous two months.
In its policy statement, the BOJ reiterated it would maintain a negative interest rate of minus 0.1 percent on banks' deposits that exceed reserve requirements along with the purchase of government bonds of around 80 trillion yen in order to keep 10-year government bond yields around 0 percent.
But today the BOJ said yields may "move upward and downward to some extent depending on developments in economic activity and prices" and purchases wold be conducted in a "flexible manner" so the annual amount outstanding rises by 80 trillion yen.
It also said it would reduce the size of the policy rate balance in banks' current account balances to which the negative interest rate is applied, from the current level of about 10 trillion yen under the condition that yield cure control can be conducted appropriately.
As part of QQE, the BOJ also purchases Exchange-Traded-Funds (ETFs) and real estate investment trusts (J-REITs) so the outstanding amounts increases at an annual pace of about 6 trillion and about 90 billion yen, respectively.
Today, the BOJ said it would change the amount of each ETF it purchases, raising that of the ETFs that track the Tokyo Stock Price Index (TOPIX).
As for commercial paper and corporate bonds, the BOJ said it would maintain their amounts outstanding at about 2.2 trillion and 3.2 trillion, respectively.
The Bank of Japan released the following statement about "Strengthening the Framework for Continuous Powerful Monetary Easing":
1. At the Monetary Policy Meeting (MPM) held today, with a view to persistently continuing with powerful monetary easing, the Policy Board of the Bank of Japan decided to strengthen its commitment to achieving the price stability target by introducing forward guidance for policy rates, and to enhance the sustainability of "Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control."
- (1) Forward guidance for policy rates [Note 1]
The Bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, taking into account uncertainties regarding economic activity and prices including the effects of the consumption tax hike scheduled to take place in October 2019. - (2) Yield curve control
The Bank decided, by a 7-2 majority vote, to set the following guideline for market operations for the intermeeting period. [Note 2]
The short-term policy interest rate:
The Bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate
Balances in current accounts held by financial institutions at the Bank.
The long-term interest rate:
The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB
yields will remain at around zero percent. While doing so, the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices.1 With regard to the amount of JGBs to be purchased, the Bank will conduct purchases in a flexible manner so that their amount outstanding will increase at an annual pace of about 80 trillion yen.
(3) Guidelines for asset purchases
With regard to asset purchases other than JGB purchases, the Bank decided, by a unanimous vote, to set the following guidelines.
- a) The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 6 trillion yen and about 90 billion yen, 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.2
- b) 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.
- In addition, the Bank decided to make the following adjustments in accordance with the measures described above.
- a) Change in the size of the Policy-Rate Balance
The Bank, under the condition that yield curve control can be conducted appropriately, will reduce the size of the Policy-Rate Balance in financial institutions' current account balances at the Bank -- to which a negative interest rate is applied -- from the current level of about 10 trillion yen on average. This Balance is calculated assuming that arbitrage transactions take place in full among financial institutions. - b) Change in the amount of each ETF to be purchased
The Bank will revise the purchase amount of each ETF and increase that of ETFs which track the Tokyo Stock Price Index (TOPIX).
- a) Change in the size of the Policy-Rate Balance
- Japan's economy is expanding moderately, with a virtuous cycle from income to spending operating, and labor market conditions have continued to tighten steadily. Meanwhile, prices have continued to show relatively weak developments compared to the economic and employment conditions. As shown in the July 2018 Outlook for Economic Activity and Prices(Outlook Report) released today, this is attributable to a combination of factors such as firms' cautious wage- and price-setting stance and households' continuous cautiousness toward price rises, and it is likely to take more time than expected to achieve the price stability target of 2 percent. However, the year-on-year rate of change in the consumer price index (CPI) is likely to increase gradually toward 2 percent with the output gap remaining positive.
- Based on the above recognition, the Bank judged it appropriate to introduce forward guidance for policy rates and to enhance the sustainability of "QQE with Yield Curve Control" by conducting market operations as well as asset purchases in a more flexible manner, thereby maintaining the output gap as long as possible within positive territory. The Bank recognizes that this will lead to achieving the price stability target of 2 percent at the earliest possible time, while securing stability in economic and financial conditions.
- The Bank will continue with "QQE with Yield Curve Control," aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner. The Bank will examine the risks considered most relevant to the conduct of monetary policy and make policy adjustments as appropriate, taking account of developments in economic activity and prices as well as financial conditions, with a view to maintaining the momentum toward achieving the price stability target.
NOTES:
1 In case of a rapid increase in the yields, the Bank will purchase JGBs promptly and appropriately.
2 The Bank will continue purchasing ETFs composed of stocks issued by firms that are proactively investing in physical and human capital at an annual pace of about 300 billion yen, as decided at the MPM held in December 2015.
[Note 1] Mr. Y. Harada dissented, considering that it was appropriate to introduce forward guidance that would further clarify its relationship with the price stability target. With a view to achieving the price stability target of 2 percent at the earliest possible time, Mr. G. Kataoka dissented, considering that it was appropriate for the Bank to make a commitment to taking additional easing measures if it revised downward its assessment of medium- to long-term inflation expectations, rather than to make the commitment to maintaining the levels of short- and long-term interest rates.
[Note 2] Voting for the action: Mr. H. Kuroda, Mr. M. Amamiya, Mr. M. Wakatabe, Mr. Y. Funo, Mr. M. Sakurai, Ms. T. Masai, and Mr. H. Suzuki. Voting against the action: Mr. Y. Harada and Mr. G. Kataoka. Mr. Y. Harada dissented, considering that allowing the long-term yields to move upward and downward to some extent was too ambiguous as the guideline for market operations decided by the Policy Board. Mr. G. Kataoka dissented, considering that (1) taking account of the current sluggishness in prices and risk factors going forward, it was desirable to strengthen monetary easing so that yields on JGBs with maturities of 10 years and longer would broadly be lowered further, and (2) controlling the long-term yields in a flexible manner would make their target level of around zero percent unclear."
www.CentralBankNews.info
0 comments:
Post a Comment