Bank of Japan extends ultra-loose monetary policy
The Bank of Japan kept its policy settings on hold on Thursday, judging that fragility in overseas economies is not serious enough to threaten steady progress towards its ambitious inflation target. In a statement, the BoJ said it would continue buying enough assets to pump up the monetary base at a rate of about Y60tn-Y70tn a year, in order to achieve stable annual price rises of 2 per cent.
The bank reiterated its generally positive view of the domestic economy, previously expressed at a policy meeting at the end of October, noting a pick-up in investment by businesses, continued strength in public spending and “resilient” private consumption. The two-day board meeting concluding on Thursday was the first since the government announced that Japan’s growth rate roughly halved from the second to the third quarter, thanks largely to a drop-off in net exports and private consumption. Growth in the first half had been the highest of any developed economy, buoyed by fiscal stimulus and the profit-boosting effects of a weaker yen. In September, the government declared an end to stagnation, saying that the economy was “on the way to recovery at a moderate pace”. It is expected to keep that assessment intact for a second month on Friday, with Akira Amari, economy minister, noting encouraging trends in industrial production, capital investment and consumer spending. At the same time, surveys of households and bond market participants suggest that inflation expectations are climbing. “It would appear – at least on the surface – that the “sticky” deflationary psychology ... that took root during Japan’s 15 years of deflation has finally been wiped away,” said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Morgan Stanley. However, there are fears that domestic demand is being pulled forward by the consumption tax increase in April. Several indices of consumer sentiment fell heavily after the prime minister’s announcement last month that the tax increase would go ahead, suggesting that households are concerned about another burden on finances amid a backdrop of price rises caused by the lower yen. An “anxiety index” published by the Nippon Research Institute, which measures how consumers view the coming 12 months in terms of the economy, employment, incomes and prices, rose to 148 in October – higher than the 145 reading last December, when Shinzo Abe returned to power vowing to shake off deflation. Meanwhile, external conditions are not providing much support. On Thursday, the BoJ gave another airing to its concerns over the European debt problem, the stop-start US recovery and patchy growth in emerging economies. Some analysts predict that the central bank is ready to supply even more stimulus in the first few months of next year. Recent dovish remarks from board members “could tip the balance in favour of additional easing at the earliest signs that growth and inflation are slowing,” said Izumi Devalier, economist at HSBC. As usual, board member Takahide Kiuchi suggested on Thursday that the BoJ adopt an alternative wording for its main policy pledge, to emphasise that the radical easing programme adopted in April is an intensive measure which should run for about two years, rather than “as long as is necessary” to hit the 2 per cent target. His proposal was struck down by eight votes to one.