The BoJ left monetary policy and its medium-term projections unchanged. The central bank expects inflation to reach its 2% target in early 2016. Nevertheless, the Bank is likely to continue its asset purchases to keep long-term interest rates under control.
- As expected, the Bank of Japan (BoJ) left monetary policy unchanged at today’s Policy Board meeting. The BoJ will pursue its asset purchase programme aiming at increasing the monetary base at an annual pace of about 60-70 trillion yen (about 14% of GDP). The amount outstanding of Japanese government bonds (JGBs) will increase at an annual pace of about 50 trillion yen and the average remaining maturity of the JGBs purchases will be about seven years.
- The statement issued after the decision was almost identical to the previous one. The Bank concluded that the economy has continued to recover moderately. It noted that business sentiment had declined following the VAT hike in April, even though it remained at a favourable level.
- The Bank updated its forecast. The growth forecasts for the next fiscal year and for fiscal 2016 were unchanged at gains of 1.5% and 1.3%, respectively. Also the inflation forecast was unchanged. Excluding the effects of the consumption tax hikes in April 2014 (3 points) and October 2015 (2 points), consumer prices could increase by 1.9% in FY2015 and 2.1% in FY2016. It implies that in the course of 2015, the underlying trend in inflation should be close to 2%, the BoJ’s target. This indicates that there is no need for stepping up monetary easing.
- However, it is too early yet to envisage an exit strategy from the very loose monetary stance. A problem for the authorities is that if long-term interest rate start rising in line with inflation expectations this could be catastrophic for the heavily indebted public sector.
- With elections for the Lower and Upper House to be held in 2016, the government is not so keen on fiscal consolidation, at least not in the short-term. On the contrary, we expect that the fiscal stance will become much more accommodative next year.
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