Bank of Japan leaves stimulus unchanged

Tokyo: Bank of Japan (BOJ) kept stimulus unchanged and left its inflation forecasts largely untouched as it waits to see the impacts of a recent decline in the yen and the policies of Donald Trump’s administration.
Governor Haruhiko Kuroda and his board will continue to buy bonds and other securities at the same pace while keeping unchanged the two policy rates controlling the yield curve, as forecast by all economists surveyed by Bloomberg. Forecasts for gross domestic product were raised, reflecting improvements in overseas economies and the weaker currency.
Even though Japan is still far from the BOJ’s 2 per cent inflation target, the yen’s recent fall against the dollar has reduced pressure on the central bank to do more because the currency will increase inflationary pressures and make exporters more competitive. Since the yield-curve control policy was introduced last September, expectations for additional stimulus have collapsed.
An increasing number of economists now think the bank may start tightening policy sometime this year. Kuroda said in a briefing after the policy decision that it’s too early to discuss an exit strategy and that the BOJ is only halfway to its inflation goal.
"The BOJ sees downside risks, such as political risks in the US and Europe,” said Atsushi Takeda, an economist at Itochu Corp. in Tokyo. "There will probably be no additional easing for some time, unless political risks and financial risks materialize, leading to a rapid gain in the yen.” Takeda said the revisions to economic growth also reflect changes to the way the government calculates the data.
Thanks to the weaker yen and higher oil prices, Japan’s core inflation index has bottomed out and is rising to near zero. Even so, most economists think that the bank’s forecasts are too optimistic, and almost no-one surveyed thinks the BOJ will reach the 2 percent inflation target as quickly as it claims.
"The BOJ is paying the most attention to what comes out of Trump, though it doesn’t say this directly," said Maiko Noguchi, an economist at Daiwa Securities. "What the BOJ really wants to see is strong wage gains helping inflation pick up, but they are not talking much about it because there’s not much hope for wages.”
Protectionism could slow the global economy, but it seems unlikely to spread around the world, Kuroda said at the briefing. The details of new economic policies in the US aren’t clear yet and the BOJ will monitor developments closely, he said.
The currency traded at 113.67 versus the dollar at 4:44pm in Tokyo, having weakened about 8 percent since the last time the BOJ released its forecasts on Nov. 1, with much of that drop coming since the election of Trump.
A weak yen helps boost corporate profits and that could lead to more investment and wage growth, though these flow-on effects have been disappointing so far.
Kuroda repeated that the BOJ isn’t targeting a level for the yen.
"The main thing for currencies is that they move in a fashion consistent with economic fundamentals, not that a currency goes way up or down,” Kuroda said. "If a nation thinks a rate is out of line with fundamentals there might be a debate.”
Investors also have their eyes on the Federal Reserve, which is due to meet later this week. While no change is expected at this gathering, US rates are poised to rise this year, further weakening the yen while also adding to strains on the BOJ’s efforts to manage the yield curve in Japan.
In the quarterly outlook report, the BOJ kept its estimates for a 1.5 per cent gain in core consumer prices in the year starting in April, which is almost twice the pace economists predicted in a Bloomberg survey.
Board members on Tuesday also updated their economic projections. The median estimates are as follows:
Kuroda was quite upbeat about the prospects for growth this year when he spoke recently in Davos, saying he saw upside risks for the global economy, assuming that protectionism doesn’t spread across the globe. The outlook statement shows the BOJ expects the economy to continue expanding at a pace above its potential growth rate, but that the risks to GDP and price estimates are "skewed to the downside."
The BOJ kept its policy rate on some bank reserves at -0.1 per cent and reiterated its pledge to keep the yield on the 10-year Japanese government bond at around 0 per cent. The board’s vote on this was 7-2.
It also extended the application period for lending-support programmes by a year, in a unanimous decision.