The Bank of Japan left policy untouched Thursday as a government stimulus package, progress in U.S.-China trade talks and signs of a bottoming of the global slowdown brightened the economic outlook.
The central bank maintained its target for interest rates and asset purchases, according to its statement Thursday, in line with the view of all 45 economist surveyed by Bloomberg. The BOJ also kept its guidance on policy unchanged, and outlined details of a stock-fund lending program aimed at improving the sustainability of its easing program.
The bank has reached the end of a precarious year without having to delve deeper into its depleted ammunition, despite a wave of easing by central banks when global deceleration looked set to deepen sharply.
That wave has largely come to an end, with the Federal Reserve pausing its interest rate cuts and new European Central Bank chief Christine Lagarde signaling the worst is likely over for the eurozone’s economy.
The phase one U.S.-China trade deal, a stabilizing of global manufacturing readings and a stronger mandate for the U.K. to leave the European Union have also given time for Gov. Haruhiko Kuroda to assess how Prime Minister Shinzo Abe’s ¥13 trillion fiscal package will prop up growth as the economy contends with a sales tax increase, an export slump and destruction caused by a super typhoon.
The recent developments were hinted at in the statement, with the BOJ no longer describing overseas risks to the economy as increasing. But it acknowledged that they remained significant, signaling that the board remains on guard. The central bank also said domestic demand would be supported by “active government spending.”
BOJ officials see a sizable impact from Abe’s fiscal spending, which is expected to boost the economy by 0.35 percentage points, according to economists surveyed.
On Wednesday the government estimated Japan’s growth to be 1.4 percent in the year starting in April, increasing a likelihood that the BOJ will upgrade its projection of 0.7 percent in a quarterly report next month.
“The BOJ is indicating nascent optimism for the outlook of the economy,” said Tetsufumi Yamakawa, head of Japan research at Barclays PLC. “This statement adds to reasons not to expect further easing for a while,” he noted, adding that it seemed too early to be less pessimistic given the continued uncertainties that remain about trade, Brexit and Japan’s economy.
“It’s interesting to see how dramatically the BOJ has changed its tone on the economy over the past several months. One of the biggest reasons is of course the yen’s depreciation and rising stocks,” Yamakawa said.
In another reminder of the mounting side effects of the BOJ’s massive easing program, the bank released details of a lending program for exchange-traded funds. As part of its large-scale asset buying, the central bank has become by far the largest owner of ETFs in Japan. The lending program should help improve liquidity in that market.
“On ETF lending, it’s not a game-changer at all,” Yamakawa said. “I think the BOJ should explain more fundamental issues like why they are continuing to buy stocks when stock prices are high and how they are going to deal with all the stock in the end.”
While maintaining its overall economic assessment, the BOJ downgraded its view of factory output after production dropped the most in October since the tsunami and earthquake disaster in March 2011, due to a typhoon and the tax hike. The bank raised its assessment of public investment after it helped prop up stronger-than-expected growth last quarter.
The BOJ maintained its forward guidance, saying it expected rates to remain low or lower as long as there was a chance of losing price momentum.
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