The Bank of Japan left monetary policy settings unchanged at the conclusion of its meeting today, in line with expectations. 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. Officials also reaffirmed their commitment to keep expanding the monetary base until the year-on-year increase in the consumer price index (excluding fresh food) exceeds their inflation target of 2.0 percent and stays above this level "in a stable manner".
This decision to keep policy settings on hold again reflects officials' assessment that inflation is on track to hit 2.0 percent sometime "around" the fiscal year starting in April 2018. Officials also announced updated forecasts for core inflation, which they expect to average 1.4 percent in the fiscal year starting April 2017, 1.7 percent in the fiscal year starting April 2018 and (excluding the impact of a planned sales tax increase) then 1.9 percent in the fiscal year starting April 2019.
Officials also announced an improvement to their assessment of the near-term growth outlook, with the Japanese economy considered to have shifted from a moderate recovery trend to a "moderate expansion". For the current and next two fiscal years, officials now have a median forecast for real GDP to grow by 1.6 percent, 1.3 percent and 0.7 percent respectively. Highly accommodative financial conditions and fiscal stimulus is expected to drive solid growth early in the forecast period before a cyclical slowdown in investment and the effects of the sales tax increase weigh on growth later.
This outlook suggests policy stability is set to continue at least in coming months. Officials have again affirmed that policy will be kept accommodative until inflation is stable above 2.0 percent . Although they argue that the momentum towards achieving the 2.0% target has been maintained, they also repeat their assessment that this momentum is still not "sufficiently firm" and that risks to this outlook are skewed to the downside.
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.