Wednesday, July 15, 2015

BOJ holds QQE target, cuts growth, inflation forecasts

    Japan's central bank maintained its target for boosting the country's monetary base by an annual 80 trillion yen, as widely expected, but lowered its forecast for economic growth and inflation for the current fiscal year while it kept the forecasts for 2016 and 2017 largely steady.
    The Bank of Japan (BOJ) said a majority of its board members now expect growth in fiscal 2015, which began on April 1, to average 1.7 percent, down from its previous forecast in April of 2.0 percent while inflation, excluding the impact of last year's sales tax hike, should average 0.7 percent, down from 0.8 percent.
   Economic growth in fiscal 2016 is forecast to average 1.5 percent, unchanged from the previous forecast, while inflation is forecast at 1.9 percent, down from April's 2.0 percent forecast.
   In April the BOJ pushed back its estimate for reaching its 2.0 percent inflation target to the first half of fiscal 2016 from the current fiscal year and its latest forecast implies that it still doesn't expect to reach this target in fiscal 2016 or fiscal 2017, adding fuel to speculation that it will further ease its policy stance in coming months.
    In fiscal 2017 economic growth is forecast to average a mere 0.2 percent, the same as seen in April, with inflation averaging only 1.8 percent, down from 1.9 percent.
   The BOJ's forecast is based on crude oil prices rising to around US$70 a barrel by the end of fiscal 2017 from $60, which means the contribution of energy to consumer prices is estimated to be around minus 0.7 to 0.8 percent for fiscal 2015 and then around plus 0.1 to 0.2 percent for fiscal 2016.
    The BOJ embarked on "quantitative and qualitative easing" (QQE) in April 2013 in an attempt to rid the country of 15 years of deflation but last year's decline in oil prices along with a larger-than-expected hit to growth from April's increase in sales taxes has thwarted its effort.
    The Japanese government is scheduled to raise the sales tax to 10 percent from the current 8 percent in April 2017 and this has been incorporated into the BOJ's forecast. The sales tax increase is estimated to push up consumer price inflation by 1.3 percentage points.

    The Bank of Japan issued the following statement (tables not included):

  1. At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided, by an 8-1 majority vote, to set the following guideline for money market operations for the intermeeting period:[Note 1]
    The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen.

  2. With regard to the asset purchases, the Bank decided, by an 8-1 majority vote, to continue with the following guidelines:[Note 1]
    1. a)  The Bank will purchase Japanese government bonds (JGBs) so that their amount outstanding will increase at an annual pace of about 80 trillion yen. With a view to encouraging a decline in interest rates across the entire yield curve, the Bank will conduct purchases in a flexible manner in accordance with financial market conditions. The average remaining maturity of the Bank's JGB purchases will be about 7-10 years.
    2. b)  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 3 trillion yen and about 90 billion yen respectively.
    3. c)  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.

  3. Japan's economy has continued to recover moderately. Overseas economies -- mainly advanced economies -- have been recovering, albeit with a lackluster performance still seen in part. In this situation, exports and industrial production have been picking up, albeit with some fluctuations. As corporate profits have improved and business sentiment has generally stayed at a favorable level, business fixed investment has been on a moderate increasing trend. Against the background of steady improvement in the employment and income situation, private consumption has been resilient and housing investment has started to pick up. Meanwhile, public investment has entered a moderate declining trend, although it remains at a high level. Financial conditions are accommodative. On the price front, the year-on-year rate of increase in the consumer price index (CPI, all items less fresh food) is about 0 percent. Inflation expectations appear to be rising on the whole from a somewhat longer-term perspective.
    1. With regard to the outlook, Japan's economy is expected to continue recovering moderately. The year-on-year rate of increase in the CPI is likely to be about 0 percent for the time being, due to the effects of the decline in energy prices.
    2. Compared with the forecasts presented in the April 2015 Outlook for Economic Activity and Prices, the growth rate will likely be somewhat lower for fiscal 2015, but will likely be more or less unchanged for fiscal 2016 and 2017. The year-on-year rate of increase in the CPI will likely be broadly in line with the April forecast.1
    3. Risks to the outlook include developments in the emerging and commodity-exporting economies, the prospects regarding the debt problem and the momentum of economic activity and prices in Europe, and the pace of recovery in the U.S. economy.
    4. Quantitative and qualitative monetary easing (QQE) has been exerting its intended effects, and the Bank will continue with QQE, 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 examine both upside and downside risks to economic activity and prices, and make adjustments as appropriate.[Note 2]

      1 Individual Policy Board members make their forecasts based on the following assumption about crude oil prices. Dubai crude oil prices are expected to rise moderately from the recent 60 U.S. dollars per barrel to about 70 dollars per barrel toward the end of the projection period. Under this assumption, the contribution of energy items to the year-on-year rate of change in the CPI (all items less fresh food) is estimated to be mostly in the range of minus 0.7 to minus 0.8 percentage point for fiscal 2015, and mostly in the range of plus 0.1 to plus 0.2 percentage point for fiscal 2016. More specifically, this contribution is expected to fall further into negative territory for the time being, followed by a narrowing in the negative contribution in the second half of fiscal 2015; in the first half of fiscal 2016, the contribution is estimated to be around 0 percentage point.
      [Note 1] Voting for the action: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Ms. S. Shirai, Mr. K. Ishida, Mr. T. Sato, Mr. Y. Harada, and Mr. Y. Funo. Voting against the action: Mr. T. Kiuchi. Mr. T. Kiuchi proposed that the Bank will conduct money market operations and asset purchases so that the monetary base and the amount outstanding of its JGB holdings will increase at an annual pace of about 45 trillion yen, respectively. The proposal was defeated by a majority vote.
      [Note 2] Mr. T. Kiuchi proposed that the Bank will, with the aim to achieve the price stability target of 2 percent in the medium to long term, continue with asset purchases and a virtually zero interest rate policy as long as each of these policy measures is deemed appropriate under flexible policy conduct based on the examination from the two perspectives of the monetary policy framework. The proposal was defeated by an 8-1 majority vote. Voting for the proposal: Mr. T. Kiuchi. Voting against the proposal: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Ms. S. Shirai, Mr. K. Ishida, Mr. T. Sato, Mr. Y. Harada, and Mr. Y. Funo. "


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