Business

BOJ keeps monetary policy unchanged and downgrades inflation assessment

by Toru Fujioka

Bloomberg

The Bank of Japan left monetary policy unchanged Friday and downgraded its assessment of inflation, falling further behind its global peers at the end of a busy week for central banks.

The BOJ maintained the settings on its yield curve control program and asset purchases, it said in a statement, a result forecast by all 45 economists surveyed by Bloomberg. The central bank downgraded its assessment of inflation after raising it in January. It now sees the core consumer price index in a range of 0.5 percent to 1 percent, from around 1 percent previously.

While the BOJ struggles, the Federal Reserve this week raised interest rates for the sixth time in 18 months and set a steeper rate-hike trajectory. The European Central Bank plotted the end of its asset purchases this year, signaling confidence in economic momentum in the eurozone.

This week’s central bank meetings made it “crystal clear” that the BOJ is headed in a different direction to its peers, said Kyohei Morita, chief Japan economist at Credit Agricole.

“What’s interesting is that there is not much call for the BOJ to add more stimulus,” Morita said. “The BOJ has done so much and it’s increasingly the view that the problem with Japan isn’t monetary policy, but more economic structure and growth strategy.” He added that with BOJ Gov. Haruhiko Kuroda now into his sixth year of aggressive stimulus, the limits of monetary policy are on show.

Kuroda said Friday that a stronger yen and cheaper accommodation prices had weighed on inflation, but momentum toward the 2 percent price target remained intact. He reiterated that the BOJ would adjust policy to maintain that momentum, if necessary, and that the current policy is sustainable.

“In the case of our nation, the labor market and the macro output gap are tightening under sustainable growth, but the pace of inflation is struggling to pick up,” Kuroda said. “So it’s appropriate for Japan to continue current powerful monetary easing persistently.”

JPMorgan Chase & Co. and Bank of America Merrill Lynch are among those who in recent weeks have changed their forecasts, pushing back their expected timing of the BOJ’s first move toward policy normalization. In a Bloomberg survey, 88 percent of analysts said it wouldn’t start until 2019 or later.

Core inflation, which excludes fresh food, slowed for a second straight month in April, to 0.7 percent.

The central bank’s downgrading of its inflation assessment wasn’t a surprise and merely reflected the facts, said Masaki Kuwahara, senior economist at Nomura Securities.

“I don’t expect changes to yield curve control for some time, and the ¥80 trillion purchase of government bonds is also off limits, but at some point the BOJ may change the phrasing of it under the pretext of improving communication,” Kuwahara said.

Still, the BOJ on Friday maintained its view that inflation is likely to trend higher toward 2 percent, citing improvement in the broad balance of supply and demand in the economy and rising medium- to long-term inflation expectations.

Board member Goushi Kataoka dissented from this view, saying the probability of inflation rising toward 2 percent is “low at this point.” He said the BOJ should implement additional stimulus if it cuts its assessment of medium- to long-term inflation expectations. Kataoka has dissented for seven consecutive meetings.

There will be intense focus on the BOJ’s next meeting at the end of July, when it is scheduled to update its inflation and economic growth projections.

Despite weaker inflation, few analysts forecast additional monetary easing. The BOJ’s toolbox is nearly empty and side effects are piling up after five years of extraordinary stimulus. The value of the assets on its balance sheet is set to exceed Japan’s annual economic output in coming months, dwarfing the amount of assets accumulated by other major central banks.

The BOJ’s dominance of the market for Japanese government bonds has created headaches.

On two days this week there was no trading of benchmark 10-year JGBs, bringing the total of such instances this year to five — the most on record. A central bank survey released this month found that about half of respondents described the market’s functioning as low.

Takashige Shibato, the head of Japan’s regional banks association, said Wednesday that its members face a “dire business environment,” partly because of prolonged ultra-low interest rates.