Bank of Japan holds monetary policy, trims inflation forecast

TOKYO: The Bank of Japan (BoJ) kept monetary policy steady yesterday and slightly trimmed its inflation forecasts as global trade frictions clouded the economic outlook, reinforcing views the central bank is in no rush to trim its massive stimulus.

But the BoJ issued a slightly stronger warning on financial vulnerabilities than it did three months ago, reflecting growing concerns that years of ultra-low rates were hurting bank profits and could discourage them from increasing lending.

“Prolonged downward pressure on financial institutions’ profits from low interest rates... could destabilise the financial system,” the BoJ said in a quarterly report assessing the long-term economic outlook and risks.

“Although these risks are judged as not significant at this point, it’s necessary to pay close attention to future developments,” it said. In the previous report in July, the BoJ only said such risks were not materialising.

As widely expected, the BoJ maintained a pledge to guide short-term interest rates at minus 0.1% and long-term rates around 0% by a 7-2 vote.

Caught between heightening external risks to growth and the mounting demerits of prolonged easing, the BoJ is set to keep policy steady for some time, analysts say.

“If it weren’t for the trade friction, the BoJ would be looking for ways to normalise policy. Normalisation is off the cards for now,” said Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

“There is no need to ease policy, but at the same time the BoJ can’t normalise policy due to worries about trade and the chance the yen will rise.”

In the quarterly report, the central bank cut its core consumer inflation forecast for the current fiscal year ending March 2019 to 0.9% from 1.1% three months ago.

It also slightly trimmed its price forecasts for the following two years and now projects inflation to hit 1.5% in the year ending in March 2021 – short of its 2% target.

“The downgrade to the BoJ’s inflation forecasts underlines that policy tightening remains a long way off,” said Marcel Thieliant, senior Japan economist at Capital Economics. – Reuters