| Consensus | Actual | Previous | |
|---|---|---|---|
| Change | 0bp | 0bp | 0bp |
| Level | -0.1% | -0.1% | -0.1% |
Highlights
The Bank of Japan said Friday its policy board decided unanimously to maintain its monetary easing stance, keeping its zero to slightly negative interest rate targets along the yield curve as well as large asset purchases to continue seeking stable 2 percent inflation and support sustainable wage growth.
But at the same time, the board decided in an eight to one vote to make the bank's existing reference range for the 10-year bond yield more flexible, basically keeping the range of minus 0.5 percent to plus 0.5 percent, but expanded its ultimate defense lines to minus 1.0 percent and plus 1.0 percent in market operations.
By providing"greater flexibility," the bank hopes to allow a natural uptick in long-term interest rates that reflects economic recovery with substantial wage hikes and mitigate the negative impact of artificially suppressing interest rates, which has paralyzed bond market functions and could negatively affect other financial markets.
Board member Toyoaki Nakamura, a former Hitachi executive with finance and accounting experience, dissented, arguing that it would be better to confirm that firms' earning power is rising in data, such as the Ministry of Finance's quarterly business survey, before allowing"greater flexibility" in the conduct of the bank's yield curve control.
The bank basically repeated its April outlook that the domestic economy should recover moderately and that inflation is expected to ease to below 2 percent in fiscal 2024 and 2025 while revising up its forecast for fiscal 2023 ending next March to 2.5 percent amid continued markups in food and durable goods, although that would be still below 3 percent seen in fiscal 2022.
"With extremely high uncertainties surrounding economies and financial markets at home and abroad, the bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions," the bank said, keeping the official line first issued in April and repeated in June.
"By doing so, it will aim to achieve the price stability target of 2 percent in a sustainable and stable manner, accompanied by wage increases."
The statement indicates that the bank could adjust its yield curve control framework to allow slightly higher interest rates in a gradual shift toward an eventual exit from a decade of large-scale monetary easing.
In April, the bank said the board would spend the next 12 to 18 months, conducting a"broad-perspective review" of the costs and benefits of the bank's various monetary easing measures implemented in the past 25 years. Achieving price stability"has been a challenge" since late 1990s when Japan plunged into deflation, it said in April.
The two-day policy meeting that ended Friday was the third one under Governor Kazuo Ueda, who took office on April 9. Ueda has said it is likely to take some time before the 2 percent inflation target is achieved and that the cost of letting inflation exceed the target is not so large as the cost of tightening too early.
BoJ Keeps Interest Rate Targets, Asset Purchases
In principle, the BoJ board maintained its decision made in December to allow the yield on the 10-year Japanese government bonds to rise to 0.5 percent from the previous cap of 0.25 percent, which was originally designed to meet upward pressures arising from last year's aggressive tightening by other major central banks.
But now it calls the upper and lower bounds of the range"references" and regards them as"not rigid limits."
It is also stretching the ultimate range, by stating,"The bank will offer to buy 10-year Japanese government bonds at 1.0 percent every business day through fixed rate purchase operations unless it is highly likely that no bids will be submitted." Previously, the bank was offering to buy long-term bonds at a fixed rate of 0.5 percent.
The board decided to introduce this new type of fixed-rate market operation in April 2022.
"In order to encourage the formation of a yield curve that is consistent with the above guideline for market operations, the bank will continue with large-scale JGB purchases and make nimble responses for each maturity by, for example, increasing the amount of JGB purchases and conducting fixed-rate purchase operations and the funds-supplying operations against pooled collateral," the bank said.
BoJ Continues to See Modest Economic Recovery
"Japan's economy is likely to continue recovering moderately for the time being supported by factors such as the materialization of pent-up demand, although it is expected to be under downward pressure stemming from a slowdown in the pace of recovery in overseas economies," the bank said in its quarterly Outlook Report for July. It removed the reference to downward pressure from past rises in commodities prices as they have already eased.
"Thereafter, as a virtuous cycle from income to spending gradually intensifies, Japan's economy is projected to continue growing at a pace above its potential growth rate," which is estimated to be zero to 0.5 percent, the bank said, repeating its April projection.
The BoJ largely maintained its inflation outlook that the year-over-year rate of increase in the core consumer price index (excluding fresh food) is likely to decelerate, with a waning of the effects of a pass-through to consumer prices of cost increases led by the past rise in import prices.
"Thereafter, the rate of increase is projected to accelerate again moderately as the output gap improves and as medium- to long-term inflation expectations and wage growth rise, accompanied by changes in factors such as firms' price- and wage-setting behavior," the bank, more or less repeating the April report.
BoJ Still Sees 'Extremely High Uncertainties'
Looking ahead, the bank noted that"there are extremely high uncertainties for Japan's economy" including developments in overseas economic activities and prices, commodity prices as well as domestic firms' wage- and price-setting behavior. It removed the Ukraine war from the list of risks but added the part about wages and pricing.
"Under these circumstances, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan's economic activity and prices," the BoJ said, repeating its recent April report. The yen remains relatively weak as the US Federal Reserve has been fighting inflation with rate hikes while the BoJ has maintained monetary easing.
Board Expects Core CPI Easing to Below 2 percent in Fiscal 2024, 2025
In the July Outlook Report, the BoJ board revised up its forecast for inflation for the current fiscal year further while foreseeing consumer prices will rise about 2 percent in fiscal 2024 but fail to be anchored at around the bank's elusive 2 percent target in a sustainable manner in fiscal 2025.
"With regard to the risk balance, risks to economic activity are skewed to the downside for fiscal 2023 but are generally balanced thereafter," the bank said, repeating its analysis provided in April.
"Risks to prices are skewed to the upside for fiscal 2023 and 2024" it said. This compares with the bank's April view that"risks to prices are skewed to the upside for fiscal 2023 but are skewed to the downside for fiscal 2025."
For fiscal 2023 ending in March 2024, the median forecast for the year-on-year increase in the core consumer price index (excluding fresh food) is 2.5 percent, up from 1.8 percent forecast in April and 1.6 percent in January. It will be lower than the 3.0 percent spike seen in fiscal 2022 but much higher than the 0.1 percent rise in fiscal 2021 the 0.4 percent drop in fiscal 2020.
The board's inflation projection for fiscal 2024 is 1.9 percent, little changed from 2.0 percent in April and 1.8 percent in January. Its forecast for 2025 is 1.6 percent, unchanged from its first estimate of 1.6 percent provided in April. This indicates that the banks' battle to reflate the economy will remain prolonged.
The spike in consumer inflation to above 4 percent at the start of the year is mostly due to elevated energy and commodities costs aggravated by the relatively weak yen. The core CPI eased to a 3.1 percent annual rate in February and March after surging to a 41-year high of 4.2 percent in January. It stood at 3.3 percent in June.
The board's median economic growth forecast for fiscal 2023 is 1.3 percent, revised down slightly from 1.4 percent projected three months ago. Its GDP forecast for fiscal 2024 was unrevised at 1.2 percent. The board expects the economy to grow at a slower pace of 1.0 percent in fiscal 2025, also unchanged from its April forecast.
Basic Easing Policy Stance in Place
At its two-day meeting that ended at around 1230 JST Friday (0430 GMT Friday/2330 EDT Thursday), the BoJ's nine-member board decided in a unanimous vote to maintain its overall monetary easing stance under the yield curve control framework that it adopted in September 2016, vowing to keep zero to negative interest rates"as long as necessary" to achieve its 2 percent inflation target in a stable manner.
Under the current framework, the BoJ is keeping the 10-year government bond yield, the benchmark for long-term borrowing costs, at around zero percent by buying"a necessary amount" of Japanese government bonds"without setting an upper limit," and to keep the overnight interest rate at minus 0.1 percent by charging 0.1 percent interest on a part of cash reserves parked at the bank by financial institutions.
The bank also confirmed its overshooting commitment, saying,"It will continue expanding the monetary base until the year-on-year rate of increase in the observed consumer price index (CPI, all items less fresh food) exceeds 2 percent and stays above the target in a stable manner."
"The bank will continue to maintain stability of financing, mainly of firms, and financial markets, and will not hesitate to take additional easing measures if necessary," it concluded.
But at the same time, the board decided in an eight to one vote to make the bank's existing reference range for the 10-year bond yield more flexible, basically keeping the range of minus 0.5 percent to plus 0.5 percent, but expanded its ultimate defense lines to minus 1.0 percent and plus 1.0 percent in market operations.
By providing"greater flexibility," the bank hopes to allow a natural uptick in long-term interest rates that reflects economic recovery with substantial wage hikes and mitigate the negative impact of artificially suppressing interest rates, which has paralyzed bond market functions and could negatively affect other financial markets.
Board member Toyoaki Nakamura, a former Hitachi executive with finance and accounting experience, dissented, arguing that it would be better to confirm that firms' earning power is rising in data, such as the Ministry of Finance's quarterly business survey, before allowing"greater flexibility" in the conduct of the bank's yield curve control.
The bank basically repeated its April outlook that the domestic economy should recover moderately and that inflation is expected to ease to below 2 percent in fiscal 2024 and 2025 while revising up its forecast for fiscal 2023 ending next March to 2.5 percent amid continued markups in food and durable goods, although that would be still below 3 percent seen in fiscal 2022.
"With extremely high uncertainties surrounding economies and financial markets at home and abroad, the bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions," the bank said, keeping the official line first issued in April and repeated in June.
"By doing so, it will aim to achieve the price stability target of 2 percent in a sustainable and stable manner, accompanied by wage increases."
The statement indicates that the bank could adjust its yield curve control framework to allow slightly higher interest rates in a gradual shift toward an eventual exit from a decade of large-scale monetary easing.
In April, the bank said the board would spend the next 12 to 18 months, conducting a"broad-perspective review" of the costs and benefits of the bank's various monetary easing measures implemented in the past 25 years. Achieving price stability"has been a challenge" since late 1990s when Japan plunged into deflation, it said in April.
The two-day policy meeting that ended Friday was the third one under Governor Kazuo Ueda, who took office on April 9. Ueda has said it is likely to take some time before the 2 percent inflation target is achieved and that the cost of letting inflation exceed the target is not so large as the cost of tightening too early.
BoJ Keeps Interest Rate Targets, Asset Purchases
In principle, the BoJ board maintained its decision made in December to allow the yield on the 10-year Japanese government bonds to rise to 0.5 percent from the previous cap of 0.25 percent, which was originally designed to meet upward pressures arising from last year's aggressive tightening by other major central banks.
But now it calls the upper and lower bounds of the range"references" and regards them as"not rigid limits."
It is also stretching the ultimate range, by stating,"The bank will offer to buy 10-year Japanese government bonds at 1.0 percent every business day through fixed rate purchase operations unless it is highly likely that no bids will be submitted." Previously, the bank was offering to buy long-term bonds at a fixed rate of 0.5 percent.
The board decided to introduce this new type of fixed-rate market operation in April 2022.
"In order to encourage the formation of a yield curve that is consistent with the above guideline for market operations, the bank will continue with large-scale JGB purchases and make nimble responses for each maturity by, for example, increasing the amount of JGB purchases and conducting fixed-rate purchase operations and the funds-supplying operations against pooled collateral," the bank said.
BoJ Continues to See Modest Economic Recovery
"Japan's economy is likely to continue recovering moderately for the time being supported by factors such as the materialization of pent-up demand, although it is expected to be under downward pressure stemming from a slowdown in the pace of recovery in overseas economies," the bank said in its quarterly Outlook Report for July. It removed the reference to downward pressure from past rises in commodities prices as they have already eased.
"Thereafter, as a virtuous cycle from income to spending gradually intensifies, Japan's economy is projected to continue growing at a pace above its potential growth rate," which is estimated to be zero to 0.5 percent, the bank said, repeating its April projection.
The BoJ largely maintained its inflation outlook that the year-over-year rate of increase in the core consumer price index (excluding fresh food) is likely to decelerate, with a waning of the effects of a pass-through to consumer prices of cost increases led by the past rise in import prices.
"Thereafter, the rate of increase is projected to accelerate again moderately as the output gap improves and as medium- to long-term inflation expectations and wage growth rise, accompanied by changes in factors such as firms' price- and wage-setting behavior," the bank, more or less repeating the April report.
BoJ Still Sees 'Extremely High Uncertainties'
Looking ahead, the bank noted that"there are extremely high uncertainties for Japan's economy" including developments in overseas economic activities and prices, commodity prices as well as domestic firms' wage- and price-setting behavior. It removed the Ukraine war from the list of risks but added the part about wages and pricing.
"Under these circumstances, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan's economic activity and prices," the BoJ said, repeating its recent April report. The yen remains relatively weak as the US Federal Reserve has been fighting inflation with rate hikes while the BoJ has maintained monetary easing.
Board Expects Core CPI Easing to Below 2 percent in Fiscal 2024, 2025
In the July Outlook Report, the BoJ board revised up its forecast for inflation for the current fiscal year further while foreseeing consumer prices will rise about 2 percent in fiscal 2024 but fail to be anchored at around the bank's elusive 2 percent target in a sustainable manner in fiscal 2025.
"With regard to the risk balance, risks to economic activity are skewed to the downside for fiscal 2023 but are generally balanced thereafter," the bank said, repeating its analysis provided in April.
"Risks to prices are skewed to the upside for fiscal 2023 and 2024" it said. This compares with the bank's April view that"risks to prices are skewed to the upside for fiscal 2023 but are skewed to the downside for fiscal 2025."
For fiscal 2023 ending in March 2024, the median forecast for the year-on-year increase in the core consumer price index (excluding fresh food) is 2.5 percent, up from 1.8 percent forecast in April and 1.6 percent in January. It will be lower than the 3.0 percent spike seen in fiscal 2022 but much higher than the 0.1 percent rise in fiscal 2021 the 0.4 percent drop in fiscal 2020.
The board's inflation projection for fiscal 2024 is 1.9 percent, little changed from 2.0 percent in April and 1.8 percent in January. Its forecast for 2025 is 1.6 percent, unchanged from its first estimate of 1.6 percent provided in April. This indicates that the banks' battle to reflate the economy will remain prolonged.
The spike in consumer inflation to above 4 percent at the start of the year is mostly due to elevated energy and commodities costs aggravated by the relatively weak yen. The core CPI eased to a 3.1 percent annual rate in February and March after surging to a 41-year high of 4.2 percent in January. It stood at 3.3 percent in June.
The board's median economic growth forecast for fiscal 2023 is 1.3 percent, revised down slightly from 1.4 percent projected three months ago. Its GDP forecast for fiscal 2024 was unrevised at 1.2 percent. The board expects the economy to grow at a slower pace of 1.0 percent in fiscal 2025, also unchanged from its April forecast.
Basic Easing Policy Stance in Place
At its two-day meeting that ended at around 1230 JST Friday (0430 GMT Friday/2330 EDT Thursday), the BoJ's nine-member board decided in a unanimous vote to maintain its overall monetary easing stance under the yield curve control framework that it adopted in September 2016, vowing to keep zero to negative interest rates"as long as necessary" to achieve its 2 percent inflation target in a stable manner.
Under the current framework, the BoJ is keeping the 10-year government bond yield, the benchmark for long-term borrowing costs, at around zero percent by buying"a necessary amount" of Japanese government bonds"without setting an upper limit," and to keep the overnight interest rate at minus 0.1 percent by charging 0.1 percent interest on a part of cash reserves parked at the bank by financial institutions.
The bank also confirmed its overshooting commitment, saying,"It will continue expanding the monetary base until the year-on-year rate of increase in the observed consumer price index (CPI, all items less fresh food) exceeds 2 percent and stays above the target in a stable manner."
"The bank will continue to maintain stability of financing, mainly of firms, and financial markets, and will not hesitate to take additional easing measures if necessary," it concluded.
Market Consensus Before Announcement
The Bank of Japan's policy board is expected to vote unanimously to maintain its monetary easing stance, keeping its zero to slightly negative interest rate targets along the yield curve and relatively large asset purchases to continue seeking stable 2 percent inflation and support sustainable wage growth.
At the same time, the board will continue debating the costs and benefits of the yield curve control policy framework that was adopted in September 2016 and the negative overnight interest rate target introduced in January 2016.
The board will assess whether it is necessary to make any adjustments to the bank's policy to allow 10-year Japanese government bond yields to fluctuate in the range of"around plus and minus 0.5 percentage points from the target level (of zero percent)." In December, the board decided to let the yield on the 10-year JGBs rise to 0.5 percent from the previous cap of 0.25 percent after domestic market rates came under upward pressures from last year's aggressive tightening by other major central banks.
The board is likely to repeat its recent statement that"the bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions."
On July 18, Governor Kazuo Ueda told reporters in India after the Group of 20 meetings of finance ministers and central bank governors that the BoJ"has continued with monetary easing patiently while paying attention to financial intermediary and market functions based on the recognition that there is still some distance before achieving sustainable and stable 2 percent inflation."
"I must say that unless the presumption (that there is some time before 2 percent inflation is achieved) is changed, the overall story will remain unchanged," he said.
In its quarterly Outlook Report, the board is expected to revise up its median forecast for consumer inflation to above 2 percent in the core CPI (excluding fresh food) for fiscal 2023 from 1.8 percent projected in April while making little change to its projections of 2.0 percent for fiscal 2024 and 1.6 percent for fiscal 2025 amid uncertainty over global growth and domestic wage hikes in the next fiscal year starting in April 2024.
At the same time, the board will continue debating the costs and benefits of the yield curve control policy framework that was adopted in September 2016 and the negative overnight interest rate target introduced in January 2016.
The board will assess whether it is necessary to make any adjustments to the bank's policy to allow 10-year Japanese government bond yields to fluctuate in the range of"around plus and minus 0.5 percentage points from the target level (of zero percent)." In December, the board decided to let the yield on the 10-year JGBs rise to 0.5 percent from the previous cap of 0.25 percent after domestic market rates came under upward pressures from last year's aggressive tightening by other major central banks.
The board is likely to repeat its recent statement that"the bank will patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions."
On July 18, Governor Kazuo Ueda told reporters in India after the Group of 20 meetings of finance ministers and central bank governors that the BoJ"has continued with monetary easing patiently while paying attention to financial intermediary and market functions based on the recognition that there is still some distance before achieving sustainable and stable 2 percent inflation."
"I must say that unless the presumption (that there is some time before 2 percent inflation is achieved) is changed, the overall story will remain unchanged," he said.
In its quarterly Outlook Report, the board is expected to revise up its median forecast for consumer inflation to above 2 percent in the core CPI (excluding fresh food) for fiscal 2023 from 1.8 percent projected in April while making little change to its projections of 2.0 percent for fiscal 2024 and 1.6 percent for fiscal 2025 amid uncertainty over global growth and domestic wage hikes in the next fiscal year starting in April 2024.
Definition
The Bank of Japan is the central bank of Japan. The Bank of Japan Act states that the bank's monetary policy should be aimed at"achieving price stability, thereby contributing to the sound development of the national economy." The nine-member policy board reviews economic conditions at home and abroad before making a policy decision. There is no specific time for the announcement. The board holds eight two-day Monetary Policy Meetings a year, in January, March, April, June, July, September, October and December. At each meeting, the board votes on the proposals on the bank’s monetary policy stance and the basic guideline on how to achieve the policy target submitted by the chair of the board, who is the bank governor.
Description
The announcement of the bank’s monetary policy decision after each meeting can cause a market reaction, even when there is no change to the policy stance. Markets tend to look ahead toward a policy shift, pricing in a change to the bank’s targets for overnight and long-term interest rates, the pace of financial asset purchases or the scale of market operations.
Market participants closely monitor the news conference by the BoJ governor that usually starts at 1530 JST (0130 EST/0230 EDT/0630 GMT), a few hours after the bank releases its policy decision. Comments from the governor could provide clues to what the bank may or may not do in the near term, which in turn could trigger buying or selling of the yen against the dollar.
Since April 2023, the bank has been conducting a"broad-perspective review" of the costs and benefits of its various monetary easing measures implemented in the past 25 years. The negative overnight interest rate target introduced in January 2016 has been unpopular among lenders as it squeezes their profit margins.
Market participants closely monitor the news conference by the BoJ governor that usually starts at 1530 JST (0130 EST/0230 EDT/0630 GMT), a few hours after the bank releases its policy decision. Comments from the governor could provide clues to what the bank may or may not do in the near term, which in turn could trigger buying or selling of the yen against the dollar.
Since April 2023, the bank has been conducting a"broad-perspective review" of the costs and benefits of its various monetary easing measures implemented in the past 25 years. The negative overnight interest rate target introduced in January 2016 has been unpopular among lenders as it squeezes their profit margins.
