Japan's central bank left its monetary policy stance unchanged, a likely disappointment to some economists and investors that were expecting another boost to its massive stimulus program, but lowered its forecast for economic growth and inflation.
The Bank of Japan (BOJ), which shocked financial markets in January by applying a negative interest rate of 0.1 percent on banks' deposits that exceed reserve requirements, trimmed its forecast for economic growth in coming years due to weaker exports from slower global growth and lowered its outlook for inflation as a consequence of slower economic activity and growth in wages.
But the central bank, which three years ago launched a program of aggressive monetary easing to rid the country of almost 15 years of deflation, again confirmed that it would continue with its current strategy of Quantitative and Qualitative Monetary Easing (QQE) with the aim of achieving its target of 2 percent inflation and "take additional easing measures in terms of three dimensions - quantity, quality, and interest rate - if it is judged necessary for achieving the price stability target."
In its outlook for economic activity, the BOJ said it expected the country's economy to "be on a moderate expanding trend" as exports should gradually improve as emerging economies move out of their current deceleration phase on the back of growth in advanced economies and domestic demand follows an uptrend.
But the central bank also acknowledged that economic growth will fluctuate due to front-loaded increases and subsequent decreases in demand prior to and after the expected rise in consumption taxes to 10 percent in April 2017.
Commenting on the current level of economic activity, the BOJ maintained its view from March that private consumption had been resilient but added today that "relatively weak developments have been seen in some indicators."
While the BOJ again said industrial output "has continued to be more of less flat," it added today that it had been affected by the recent Kumamoto Earthquake and although business sentiment was generally favorable, it had become cautious due to the slowdown in emerging economies.
In response to the earthquake, the BOJ launched a one-year, zero percent, loan program to financial institutions in the disaster area of up to 300 billion yen.
In an update of its forecast, the BOJ again trimmed its outlook for growth in in fiscal 2015, which ended on April 1, 2016, to an average of 0.7 percent from January's forecast of 1.1 percent. In January the growth forecast was cut from October's forecast of 1.2 percent.
The forecast for consumer price inflation, minus fresh food, in fiscal 2015 was lowered to zero percent from 0.1 percent.
In March Japan's headline inflation rate fell to a lower-than-expected minus 0.1 percent from 0.3 percent in February, the first fall in inflation since May 2013, sparking expectations in financial markets that the BOJ would either cut interest rates further or expand asset purchases from the current target of 80 trillion yen.
For fiscal 2016, the average growth forecast of BOJ policy board members was lowered to an average 1.2 percent from January's forecast of 1.5 percent while the outlook for inflation was cut to 0.5 percent from a previous forecast of 0.8 percent.
For fiscal 2017 the growth forecast was cut to 0.1 percent from 0.3 percent while the forecast for consumer price growth, excluding the impact of higher taxes, was lowered to 1.7 percent from 1.8 percent. Including the effect of higher taxes, the forecast was trimmed to 2.7 percent from 2.8 percent.
For fiscal 2018, the BOJ forecast growth of 1.0 percent and inflation of 1.9 percent, still slightly below its target. Underlying the inflation forecast was the assumption that crude oil prices would rise to a range of $45 - 50 by fiscal 2018 from the current level of $35.
The Bank of Japan issued the following statement:
1. At the Monetary Policy Meeting (MPM) held today, the Policy Board of the Bank of Japan
decided upon the following.
(1) Quantity Dimension: The guideline for money market operations
The Bank 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) Quality Dimension: The guidelines for asset purchases
With regard to the asset purchases, the Bank decided, by an 8-1 majority vote, to set the
following guidelines:[Note 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 7-12 years.
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 3.3 trillion yen 1) and about 90 billion yen, respectively.
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.
1) Of about 3.3 trillion yen, 300 billion yen is used in line with the implementation of a program for
purchasing ETFs composed of stocks issued by firms that are proactively investing in physical and human
capital, as decided at the MPM held in December 2015.
(3) Interest-Rate Dimension: The policy rate
The Bank decided, by a 7-2 majority vote, to continue applying a negative interest rate of
minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial
institutions at the Bank.[Note 2]
2. In addition, with a view to supporting financial institutions in disaster areas affected by the
Kumamoto Earthquake in their efforts toward meeting demand for funds for restoration and
rebuilding, the Bank decided by a unanimous vote to introduce a funds-supplying operation
for these financial institutions. The specifics of this operation are the following: the total
amount of loans is set at 300 billion yen; the Bank will provide loans at a zero interest rate;
and twice as much as the amount outstanding of financial institutions' borrowing through this
operation will be added to their Macro Add-on Balances, to which a zero interest rate is
1) Of about 3.3 trillion yen, 300 billion yen is used in line with the implementation of a program for purchasing ETFs composed of stocks issued by firms that are proactively investing in physical and human capital, as decided at the MPM held in December 2015.
[Note 1] Voting for the action: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Mr. K. Ishida, Mr. T. Sato,
Mr. Y. Harada, Mr. Y. Funo, and Mr. M. Sakurai. 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] Voting for the action: Mr. H. Kuroda, Mr. K. Iwata, Mr. H. Nakaso, Mr. K. Ishida, Mr. Y. Harada,
Mr. Y. Funo, and Mr. M. Sakurai. Voting against the action: Mr. T. Sato and Mr. T. Kiuchi.
Mr. T. Sato and Mr. T. Kiuchi dissented considering that an interest rate of 0.1 percent should be
applied to current account balances excluding the amount outstanding of the required reserves held
by financial institutions at the Bank, because negative interest rates would impair the functioning of
financial markets and financial intermediation as well as the stability of the JGB market. "