Konnichiwa, forex friends! The BOJ announced its most recent monetary statement earlier. And if you missed it, here are the 5 highlights that you may wanna know about.
1. BOJ maintained current monetary policy
As widely expected, the BOJ decided to maintain its current monetary policy, so the policy rate is still at -0.10% while the stock of commercial paper and corporate bonds will be maintained at ¥2.2 trillion and ¥3.2 trillion respectively.
With regard to its asset purchase program, the BOJ affirmed that it will continue to buy exchange-traded funds and Japanese real estate investment trusts at an annual pace of ¥6 trillion and ¥90 billion respectively. Purchases of Japanese government bonds, meanwhile, still have no set amount but are expected to increase at an annual pace of ¥80 trillion per year, in accordance with the Bank’s so-called “QQE With Yield Curve Control” framework where the BOJ aims to keep 10-year JGB yields at around zero percent.
2. Inflation forecasts downgraded (again)
The BOJ also decided to downgrade its inflation forecasts for the fiscal years 2017, 2018, and 2019. This marks the sixth time (so far) that the BOJ has been forced to face reality and downgrade its inflation projections.
CPI is now forecasted to rise by 1.1% year-on-year in 2017, down from the BOJ’s original super optimistic forecast of 1.4%.
The forecast for 2018, meanwhile, was revised lower from 1.7% to 1.5% while the forecast for 2019 (excluding the expected boost from the consumption tax hike) was downgraded from 1.9% to 1.8%.
Not all that surprising, though, since I did quip that I wouldn’t be surprised if the BOJ decides to scale down its CPI forecast a bit after pointing out in my most recent Economic Snapshot for Japan that the BOJ’s own measure for core CPI in June (+0.3%) is a galaxy away from its super optimistic forecast (+1.4%).
As to why, the BOJ downgraded its inflation projections, the BOJ gave its usual explanation (complaint, to be more accurate), which all boils down to the deflationary mindset in Japan that influences inflation expectations. And inflation expectations, in turn, influence the price of goods and the wage-setting behaviour of companies, which ultimately results in weaker inflation. To quote directly from the BOJ’s Outlook for Economic Activity and Prices:
“[T]he mindset and behavior based on the assumption that wages and prices will not increase easily have been deeply entrenched among firms and households.”
“Firms have been making efforts to absorb a rise in labor costs by increasing labor-saving investment and streamlining their business process, while limiting wage increases.”
“As suggested by these developments, firms’ wage- and price-setting stance has remained cautious despite the steady tightening of labor market conditions and the high levels of corporate profits.”
The BOJ is hopeful that inflation will pick up, though. And it cited three main reasons:
- The improving output gap, which would hopefully apply inflationary pressure sooner or later.
- Tentative and recent signs that the downtrend (since spring 2015) in medium to long-term inflation expectations may finally end.
- Higher import prices due to the recent rise in commodity prices and the yen’s relative weakness, which will hopefully further prop up inflation expectations.
3. GDP forecasts upgraded
Interestingly enough, the BOJ also upgraded its GDP projections for the fiscal years 2017 and 2018, so GDP is now expected to expand by 1.8% year-on-year in 2017 (up from +1.6%) and by 1.4% in 2018 (+1.3% originally).
The BOJ’s upgraded growth projections hinge on two main factors. And the first is that the BOJ expects consumer spending, business investment, and government investment to pick up because of:
- The 2020 Olympic Games in Tokyo. Banzai!
- The government’s large-scale stimulus measures and regulatory and institutional reforms, which has resulted in “an increase in labor participation by women and the elderly.“
- And last but not the least (in the BOJ’s mind), highly accommodative financial conditions due in part to the BOJ’s monetary policy.
The second factor for the higher growth projections is that exports are expected to rise and underpin the economy because overseas demand for Japanese goods are expected to increase since “the growth rates of overseas economies are expected to increase moderately as advanced economies continue growing steadily and a recovery in emerging economies takes hold on the back of the steady growth in advanced economies and the effects of policy measures taken by emerging economies.”
The BOJ expects the pace of GDP growth to taper over the forecast period, though, since business and government investments related to the 2020 Olympic Games are expected to weaken and the increase in sales tax (by October 2019) is expected to hurt consumer spending.
4. BOJ still has an easing bias but…
The BOJ concluded that on balance, “risks to both economic activity and prices are skewed to the downside.”
As such, the BOJ said that it still has an easing bias. BOJ Boss Kuroda even said during the BOJ presser that “It’s not as if we have run out of policy tools.”
Even so, Kuroda was quick to add that:
“We think the momentum for hitting our price target remains intact and can be sustained under the current policy framework.”
“With the momentum for hitting 2 percent inflation sustained, I don’t see the need to conduct another comprehensive assessment of our policy framework … We also see no need now to ramp up stimulus.”
In short, the BOJ still has an easing bias, at least with regard to its QE program, but the BOJ doesn’t think it’s necessary to ease further yet.
5. The event was mostly a dud (again)
Gone are the days when the BOJ statement could really rock the yen since the BOJ statement only had minimal direct impact on the yen’s price action. Not all that surprising, I suppose, since the BOJ wasn’t expected to make a move and the downgrade to its CPI forecasts were pretty much a given.
The yen did get some follow-through selling pressure on some pairs and the yen was mostly weaker ahead of the BOJ statement, so it’s possible that the BOJ statement could have directly influenced the yen’s price action. But then again, bond yields were on the rise and there were signs of risk-taking in Asia and Europe, so we can’t really fully pin the yen’s weakness ahead of and after the BOJ statement on, well, the BOJ statement.