BOJ At A Turning Point

At today’s monetary policy meeting, the BoJ Policy Board decided to keep the policy rate unchanged. The next BoJ governor favours a more aggressive monetary policy to get the economy out of deflation. The monetisation of the debt will undoubtedly create more inflation through the weakening of the yen.

At today’s monetary policy meeting – the last chaired by Governor Masaaki Shirakawa – the BoJ Policy Board decided to keep the policy rate unchanged in the narrow fluctuation band between 0 and 0.1%. The Board was not in the mood of changing policy as it preferred to wait for the next BoJ governor, Haruhiko Kuroda, who will take up the post next month after the confirmation of his nomination by both houses of parliament by March 19. The Board rejected the proposal to advance the date at which the open-ended purchasing method for long-term JGBs will begin; as decided last month, the programme will start on January 1, 2014. Another proposal to strengthen the forward guidance by promising to keep interest rates at zero until the BoJ judges the price stability target to be in sight was rejected for the second time.

The Board agreed that the economy had stopped weakening, largely due to increases in public investment in housing. Moreover, exports had stopped decreasing due to the strengthening of overseas economies while private consumption and investment in the non-manufacturing sector had shown signs of resilience. The Board expects activity to remain broadly flat for the time being before returning to a moderate recovery path.

Inflation is at around 0%, well below the 2% target. It is likely to decline further due to base effects related to last year’s increase in energy prices and durable consumer goods. The BoJ reiterated that achieving the inflation target requires efforts from a wide range of entities toward strengthening competitiveness and growth potential.

The BoJ will pursue monetary easing to achieve the target at the earliest possible time. However, it warned that it might take a considerable time before the effects of monetary policy permeate the economy. Moreover, the bank warns about the possible accumulation of financial imbalances.

BY Raymond VAN DER PUTTEN

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