The BoJ left monetary policy unchanged. The weaker data in recent months was attributed to a prolonged effect of the VAT hike and bad weather. It also maintained that price expectations are rising, even though some indicators have been flat in recent months, to avoid that markets would expect a further stepping up of monetary easing.

  • Today, the Bank of Japan decided to keep the Quantitative and Qualitative Easing (QQE) policy unchanged. The Bank will purchase assets, in particular JGBs and Treasury Bills, in order to increase the monetary base at an annual pace of about JPY 60-70 trillion. As usual, the proposal of Mr. Kiuchi to limit the time frame to about two years was rejected by an 8-1 vote.

  • In the statement issued after the meeting, the Policy Board noted that some weakness was observed on the production side. This was in reaction to the weak September Tankan, which showed that overall business conditions had weakened compared to the previous survey (see EcoFlash 14-222, Sobering September Tankan, 1 October). The Board also noted that industrial production was showing some weakness, due in part to inventory adjustments. Nevertheless, it maintained, as in previous statements, that the economy had continued to recover moderately as a trend, and that this trend should continue in the coming quarters.

  • Earlier in the day, Governor Kuroda had said before the parliament that the observed weakness was related to the prolonged effect of the VAT hike and the bad summer weather.

  • On prices, the Policy Board noted that inflation, excluding the effects of the VAT hike, had been around 1.25% and would remain at that level for some time. It agreed that inflation expectations had been on an upward trend. However, a suggestion by Ms. Shirai to note that an increasing number of indicators for price expectations had been more or less flat recently was rejected. This was probably done for political reasons, as it would have suggested that the BoJ could soon adopt more easing measures.

  • The Policy Board is probably right to shrug off the recent string of weak data, which are indeed related to the bad weather and a more prolonged than previously expected impact of the VAT rise. Moreover, the Board is worried to step up QQE, as it is unclear how to exit the policy at one stage without causing severe stress on government finances and Japan’s financial system.

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