Summary
- BoJ leaves interest rates and stimulus program unchanged
- Inflation forecasts pushed further back
- BoJ expectations inflation to rise 1.8% in the fiscal year 2018/2019
- BoJ upgrades GDP expectations, attributes it to the central bank’s QQE program
- BoJ expects inflation to reach 2% sometime during 2019
The Bank of Japan met last Thursday, July 20 for its monthly monetary policy meeting. As widely expected, the Bank of Japan left the key interest rates unchanged at -0.10% and its QQE stimulus program untouched.
The central bank maintained the yield target on the 10-year Japanese Government Bonds (JGB’s) around zero percent.
The central bank reiterated its commitment towards achieving the inflation target, thus noting that the QQE program would stay until the inflation target was met.
BoJ lowers inflation forecasts, upgrades GDP
In a surprise move, however, which was expected from some circles, the BoJ lowered the inflation forecasts for 2017 and 2018 and beyond for the next two years. However, the central bank upgraded the gross domestic product (GDP) forecasts for the same period.
According to central bank communication, inflation is expected to be at 1.1% for the fiscal year 2017. This was lower than the 1.4% inflation forecast that the central bank had previously forecast.
For the next fiscal year, the BoJ said that inflation could rise to 1.8%, slightly down from the previous forecasts of 1.9%. The timing of the inflation expectations was also pushed back with expectations that the central bank will reach the 2% inflation target sometime in 2019.
"The timing of the year-on-year rate of change in the CPI reaching around 2 percent will likely be around fiscal 2019," the BoJ said in its official statement.
Some economists were expecting that the BoJ could completely shift its stance from inflation targeting, which did not happen.
While inflation forecasts were lowered, there was some positive news on growth. The BoJ was upbeat, noting that the GDP expectations for the current year could be around 1.8%, followed by a 1.4% increase for the next fiscal year.
The GDP forecasts were higher than the previous estimates given, which was 1.6% for the current fiscal year and 1.3% for the year after.
Japan’s GDP at 1.3% in Q1 of 2017
According to the most recent estimates, data showed that Japan’s GDP grew at an annual rate of 1.3% in the first quarter of 2017. Previously, the GDP growth rate was registered at 1.6% which marked four consecutive quarterly periods of expansion.
At 1.3%, Japan’s GDP is still somewhat higher and better than the third quarter 2016 GDP which was registered at 1.1%.
The BoJ’s statement said that the Japanese economy would continue to expand at a moderate pace. The central bank noted that domestic demand would be following an uptrend with income and spending driving growth both on the household and corporate sectors. This was attributed to the BoJ’s QQE program.
The most recent data, however, showed that inflation is Japan continues to remain stubbornly weak. The wider economy is expected to be a firm footing, however, earlier in the day, data showed that exports in Japan rose at a pace of 9.7% in June. This was higher than the expectations of 9.5%.
By pushing inflation forecasts even further, this makes it the fourth time since Kuroda; the BoJ governor began the massive monetary stimulus program in 2013. The BoJ’s unchanged stance comes at a time when central banks elsewhere are beginning to tighten monetary policy.
