BoJ maintains stimulus as inflation lags growth

TOKYO: The Bank of Japan (BoJ) left policy settings unchanged in the final meeting of 2017, retaining its unprecedented monetary stimulus 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% 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 normalisation.

Economists and investors are looking further ahead, with some speculating that the BoJ will join some of its international counter- parts in tightening policy next year. Governor Haruhiko Kuroda said at a press briefing later yesterday that the central bank didn’t need to reconsider its current policy framework.

“Next year, if the current economic growth trend continues then there should be ever increasing expectations for monetary policy normalisation,” said Junko Nishioka, chief economist at Sumitomo Mitsui Banking Corporation and a former BOJ official.

The BoJ board’s vote yesterday 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 programme, setting an interest rate of -0.1% on some bank reserves and a target of around 0% 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% 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% in October, well below the BoJ’s target.

In its statement yesterday, the BoJ offered a slightly more upbeat view of business investment and private consumption, and noted steady improvement in employment and incomes, but also said inflation expectations remain in “a weakening phase.”

“The BoJ is gaining confidence in the strength of the economic recovery and tweaking the language of its assessment of economic conditions to indicate their optimism,” said Maiko Noguchi, a senior economist at Daiwa Securities and a former BoJ official. “But it’s too early to think that optimism will lead to a policy change soon as their view on inflation hasn’t changed at all.”

Economists from Barclays and Nomura Securities are among 19 predicting the BoJ will begin normalising 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.

He said Thursday that financial intermediation hasn’t been impaired in Japan and that talk about the theory doesn’t indicate any need for policy change.