The Bank of Japan kept its monetary policy unchanged following the comprehensive assessment of the monetary easing stimulus conducted by Governor Haruhiko Kuroda. After which, Japanese Prime Minister Shinzo Abe supported the decision of the bank, with expectation of achieving 2 percent inflation target as soon as possible.
Comprehensive Assessment And Yield Curve Control
Speaking at the meeting with business leaders in Osaka, Governor Kuroda explained the main points included in the “QQE with Yield Curve Control” introduced after the comprehensive assessment last week. The new framework aims to strengthen the current framework for monetary easing.
According to Kuroda, the new policy framework consists of two major components. “The first is "yield curve control" in which the Bank sets short-term and long-term interest rates as an operating target, and the second is an "inflation-overshooting commitment" in which the Bank commits itself to maintaining an increase in the monetary base until the annual rate of increase in the observed CPI exceeds the price stability target of 2 percent and stays above the target in a stable manner.”
The BoJ believed that the combination of the negative interest rates and the Japanese government bonds is effective on the whole yield curve. To achieve the new framework, the bank intends to utilize short-term policy rates and an operating target for the long term during the market operations. Further, the bank disclosed the fixed-rate JGB purchase operations, which are intended to cap long-term rates whenever the situation calls for it.
In terms of the inflation-overshooting commitment, the central bank of Japan has committed itself to expand the monetary base until the year-over-year rate of increase in the observed CPI surpass the price stability target of 2 percent remains above the target at a stable level.
Mr. Kuroda reiterated that the commitment is based on the price stability target of 2 percent and it is not meant to raise the inflation target in the long run. “Achieving the price stability target of 2 percent means attaining a situation in which the observed CPI is around 2 percent on average over the business cycle. Thus, it naturally is assumed from the outset that there would be phases when the observed CPI stays above 2 percent,” Kuroda explained.
With the new “QQE with Yield Curve Control”, the bank expects for a forceful method of imposing monetary easing and achieve the inflation stability at the earliest possible time with the support provided by the yield curve control. The Bank also indicated the openness for any monetary adjustments if they find it necessary for the Japanese economy.
Monetary Policy
Amid the moderate recovery of the Japanese economy and the new policy framework, the Bank of Japan decided to leave its benchmark rates unchanged. In the July minutes, the bank acknowledged that the interest rates on both overnight and term instruments had been in the negative territory.
Moreover, the exports and the industrial productions are forecasted to remain flat due to the automobile fluctuations and the impact of the Kumamoto Earthquake respectively. The housing investment, private consumption and business fixed investments contribute to the improvement of the economy.
To ensure smooth funding in foreign currencies by Japanese companies and financial institutions, the staff came up with two proposals; increase the size of the Bank’s U.S. dollar denominated lending program to support growth and to establish a new facility for lending securities to be pledged as collateral for the U.S. Dollar Funds-Supplying Operations.
Meanwhile, Prime Minister Shinzo Abe lauded the effort of Governor Haruhiko Kuroda and the policy steps taken by the BoJ.