(Bloomberg) BOJ Maintains Stimulus as Inflation Lags Behind Economic Growth

By Toru Fujioka
December 20, 2017, 9:51 PM EST

• Focus turns to chance of policy normalization starting in 2018
• Kuroda’s recent comments heightened speculation about change

The Bank of Japan left monetary stimulus unchanged in the final policy meeting of 2017, remaining on cruise control as it waits for a pickup in stubbornly low inflation.

The central bank will continue to target interest rates and buy financial assets to achieve its 2 percent inflation goal, it said in statement on Thursday. The result was predicted by all 44 economists surveyed by Bloomberg.

With Japan’s economy continuing to grow at a healthy pace, and inflation at least moving in the right direction, there is little pressure on the BOJ to act any time soon. This sets it apart from its global counterparts, with the Federal Reserve hiking interest rates and the European Central Bank moving closer toward policy normalization.

 

“A solid economic recovery is giving the BOJ time to sit tight,” Norio Miyagawa, a senior economist at Mizuho Securities Co., said before the decision. “The BOJ’s plan for now is to wait and see by sticking with the current stimulus.”

Yet economists and investors are looking further ahead, with some speculating that the BOJ will join some of its international counterparts in tightening policy next year. Governor Haruhiko Kuroda’s press briefing later Thursday will be parsed for clues as to whether and when that might happen.

The BOJ board’s vote on Thursday was 8-1 on policy rates and unanimous on asset purchases. Goushi Kataoka, who joined the board in July, dissented on the policy rates.

The BOJ hasn’t altered its policy framework since September 2016, when it implemented its yield-curve control program, setting an interest rate of -0.1 percent on some bank reserves and a target of around 0 percent for 10-year government bond yields. It also continues to buy enormous amounts of assets, mostly Japanese government bonds.

In a sign of how little pressure Kuroda faces to take additional action, he has been called to parliament only 19 days this year. That’s down from 51 days last year and is the fewest for any BOJ governor since 2007.

Japan’s economy is now in the longest expansion in more than two decades. Gross domestic product grew 2.5 percent in the third quarter, while confidence among large manufacturers rose to the highest level since the global financial crisis. Even so, prices excluding fresh food rose only 0.8 percent in October, well below the BOJ’s target.

Economists from Barclays and Nomura Securities are among 19 predicting the BOJ will begin normalizing policy next year, according to a Bloomberg survey of 44 economists. Analysts at Credit Suisse and Oxford Economics are among the few who see further easing as the BOJ’s next step.

Kuroda’s comments last month on the “reversal rate” theory stoked speculation about an earlier policy exit. The theory posits that monetary stimulus could end up hurting commercial banks’ profitability, making them less likely to lend.

The comments weren’t meant as a policy signal but were intended to point out the risks of additional stimulus after Kataoka’s calls for more, according to people familiar with the central bank’s discussions.

Source: Bloomberg

Image Courtesy: Fortune