Japan: BOJ on hold despite marked downward revision of inflation forecast

The Bank of Japan (BoJ) did not announce any major new easing measures in connection with today’s monetary meeting although it did announce an extension of some minor loan programmes that were set to expire in April. The target for the annual expansion of the monetary base (the main policy instrument) was maintained at JPY80trn.

As expected, the BoJ revised its inflation forecast for fiscal-year 2015 (ending March 2016) markedly lower to 1.0% from 1.7% previously. However, it revised its inflation forecast for FY 2016 marginally higher to 2.2% from 2.1% previously. As expected, in its statement it also softened its view and believes it could decline further in the short run. Importantly, the statement also said, ‘with regard to CPI, the outlook for the underlying trend remains unchanged’ and ‘inflation expectations appear to be rising on the whole from a longer-term perspective’.

In connection with today’s meeting, the BoJ extended three minor lending facilities by a year. These were set to expire in April and were also extended by a year in February 2013. Hence, this should only be regarded as easing on the margin. In the statement, it did not explain these extensions as a response to the weaker inflation outlook.

The bottom line from today’s meeting is that the BoJ is unlikely to ease on the back of the decline in headline inflation we are likely to see in the coming months. It can live with a temporary decline as long as the economy continues to recover and inflation expectations do not decline substantially.

Slight disappointment in the market, and we have seen a slightly stronger JPY in the wake of the announcement.