The Bank of Japan left monetary policy settings unchanged at the conclusion of its meeting today, in line with expectations. As part of its recently adopted policy framework, which involves targeting the shape of the yield curve, the BoJ's short-term policy rate for excess reserves remains at minus 0.1 percent while the target level for the long-term 10-year yield remains at around zero percent. Officials voted 7-2 in favour of this decision.
The BoJ's policy framework also involves officials adjusting the pace of their purchases of Japanese government bonds in order to keep the 10-year yield close to its target level. For now, officials continue to believe that purchasing these bonds at an annual rate of Y80 trillion is consistent with meeting this target.
This decision to keep policy settings on hold again reflects officials' assessment that monetary and fiscal policy stimulus will likely allow Japan's economy to continue to grow at a pace "above its potential" of around 0.0 to 0.5 percent over the next two years. Relative to the last assessment of the outlook in October, policy board members have revised up their median forecasts for GDP growth from 1.0 percent to 1.4 percent for fiscal year 2016, from 1.3 percent to 1.5 percent for fiscal year 2017, and from 0.9 percent to 1.1 percent for fiscal year 2018. These upward revisions reflect an improved outlook for other major economies and the recent depreciation of the domestic currency. Incoming data have already shown stronger external demand, improved conditions in the manufacturing sector, and stronger growth in household spending in recent months.
Officials also remain confident that year-on-year increases in the consumer price index will eventually pick up to around the target of 2.0 percent. However, there is little change in their forecast for core CPI (excluding fresh food prices). This price measure is forecast to fall by 0.2 percent year-on-year in fiscal year 2016, compared with a previous forecast of a fall of 0.1 percent. Officials have retained their forecast for this index to increase by 1.5 percent year-on-year in fiscal year 2017 and by 1.7 percent year-on-year in fiscal year 2018
The latest inflation data show domestic price pressures remain subdued. Japan's consumer price index rose 0.3 percent year-on-year in December, down from 0.5 percent in November, with a weaker increase in food prices offsetting smaller drop in energy prices. The Bank of Japan's preferred measure of price changes, which excludes the prices of fresh food and energy, also showed a weaker year-on-year increase, up 0.1 percent in December from 0.2 percent in November. Although officials acknowledge various downside risks to their inflation forecasts, they continue to argue that the impact of exchange rate moves and commodity prices on headline CPI will soon shift from negative to positive, and that tighter labour market conditions will also likely boost price pressures over time.
Based on this assessment, the BoJ has again concluded that current policy settings are sufficient to meet its inflation target. Officials continue to expect that this target will be met by around early 2019. They also reaffirmed their commitment to keep expanding the monetary base until inflation exceeds the target in a "stable manner" and again promised to adjust policy '"as appropriate" in order to maintain the momentum towards achieving the target. BoJ Governor Haruhiko Kuroda will provide more details about officials' assessment of the outlook in his post-meeting press conference.
The Bank of Japan is the central bank of Japan. The monetary policy board (MPB) reviews economic conditions at home and abroad before making a policy decision. A decision is announced eight times a year at the conclusion of its MPB meetings. There is no specific time for the announcement.
The Bank of Japan Policy Board meets once a month for two days to discuss economic developments inside and outside of the country. The culmination of the meeting is the announcement of any adjustments to interest rates or other aspects of monetary policy. Like other central banks, the BoJ's goal is to ensure price stability while taking into account economic growth, employment and recommendations from the elected government while maintaining its independence. Unlike other central banks, the BoJ does not have an inflation target and has been engaged in fighting deflation. And while prices have risen thanks to soaring energy prices, these increases look fragile going forward.
The Bank announces its conclusions in a statement issued at the close of the monetary policy board meeting. The meetings are generally followed by a press conference by the Bank's governor. Needless to say, his comments are parsed carefully by the financial markets. In addition, the BoJ publishes minutes of the meeting about a month or so after the meeting but give detailed insight into the Bank of Japan's monetary policy decision making process. Every month the Bank releases a report covering trends in the Japanese economy and relevant international developments. The report summarizes recent economic indicators and gives the Bank's official position on Japanese economic growth. Because the BoJ sets monetary policy, any insight into the conclusions and assumptions the Bank is operating under can be helpful in predicting future interest rate actions.