The Bank of Japan left monetary policy unchanged

KAZUHIRO NOGI / AFP / Getty Images

The Bank of Japan (BoJ) left monetary policy unchanged at the conclusion of its January meeting, a decision that was almost unilaterally expected by financial markets.

Voting 7-2, the bank decided to retain its quantitative and qualitative monetary easing (QQE) with yield curve control program, keeping interest rates unchanged at 0.1% while pledging to purchase Japanese government bonds (JGB) so that 10-year JGB yields will remain at around zero percent.

It said that it will conduct JGB purchases at an annual pace of around 80 trillion yen with the aim “to achieve the target level of the long-term interest rate specified by the guideline”, in this case 0%.

The bank also left its annual purchases of exchange traded funds, Japan real estate investment trusts and corporate paper and bonds unchanged at about 6 trillion yen, 90 billion yen and 5.4 trillion respectively.

As it has now done for several meetings, it pledged to continue with its QQE with yield curve control program for “as long as it is necessary” to achieve its inflation target of 2% “in a stable manner”.

The decision to leave monetary policy settings unchanged came despite an upgrade to the bank’s real GDP growth forecasts for the next two financial years, an outcome that was also widely expected by financial markets.

The BOJ now sees real GDP growth of 1.5% in the 2017 fiscal year, up from its previous forecast of 1.3% offered in November last year, with growth in the 2018 fiscal year now expected to come in at 1.1%, 20 basis more than it’s previous assessment.

However, despite those upward revisions to its GDP forecasts, the BoJ left its forecasts for core consumer price inflation (CPI), which excludes the effect of fresh food prices, unchanged over the same period.

Core CPI is expected to accelerate to 1.5% in the next financial year, before rising further to 1.7% in fiscal year 2018.

Both remain below the bank’s 2% inflation target, although the bank still sees this being reached around fiscal year 2018.

Source: BoJ

Perhaps explaining the caution towards its inflation forecasts, aside from consistently undershooting the bank’s forecasts in recent years, the BoJ said that momentum towards achieving its price stability target are not yet “sufficiently firm”, suggesting that developments in prices continues to warrant “careful attention”.

It also said that risks for both its GDP and inflation forecasts remain to the downside.

“With regard to to the outlook for economic activity, risks are skewed to the downside, particularly those regarding developments in overseas economies,” the bank said.

It also cited risks from overseas economies and developments in medium-to-long term inflation expectations as downside risks to its inflation forecasts.

In particular, the BoJ said that there was uncertainty surrounding the outlook for both the US and Chinese economies, the largest in the world, along with the European Union following the UK Brexit vote, creating both upside and downside risks.

Along with uncertainty over how those major economies will perform, it also said that developments in currency markets and international commodity prices “may lead prices to deviate either upward or downward from the baseline scenario”.

Despite delivering few surprises, Japanese stocks have extended earlier losses following the BoJ announcement with the TOPIX currently trading down 1.4%.

That’s likely in response to continued strength in the Japanese yen with the USD/JPY currently trading down 0.2% at 113.53, having fallen to as low as 113.25 in the immediate aftermath of the BoJ announcement.

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