BOJ Is Not For Turning

■ The Bank of Japan (BoJ) left monetary policy unchanged at today’s Policy Board meeting. The aim is to increase the monetary base at an annual rate of about JPY 60-70 trillion (13% of GDP). The amount of JGBs held by the BoJ will increase by about JPY 50 trillion per annum. According to the authorities, this should be sufficient to make steady progress to reaching the bank’s 2% inflation target. This policy has been in place since early April.

■ The Policy Board shrugged off the deceleration of GDP growth in the third quarter to a still very robust 0.5% by maintaining its assessment that the economy has been recovering moderately. On the external side, it noted that exports had picked up. Indeed, in October, the quarterly growth rate of exports increased to 1.3%. Moreover, domestic demand has remained firm. The board even noticed some improvements in the income situation for households, thanks to increases in employment. Moreover, financial conditions have remained very accommodative.

■ The Board remarked that inflation (CPI excluding fresh food) had increased to the range between 0.5% and 1%. Moreover, inflation expectations appeared to be rising on the whole. However, the Policy Board glossed over the fact that the increase in prices is mainly in energy following the depreciation of the yen. Firms mainly operating in the domestic market have found it very difficult to pass on these costs to their customers. Moreover, these increases have been weighing on purchasing power as wages have hardly moved. On the contrary, in September wages were 0.2% lower from a year earlier.

■ Inflation expectations have indeed been increasing. That is not surprising as on 1 April 2014 the consumption tax rate will be hiked by three points to 8%. It has prompted household to bring forward their spending. We expect private domestic demand to collapse in the wake of the VAT hike. The government has already announced that it will counteract this by an additional spending package, which includes public works spending and tax breaks encouraging companies to boost capital spending and wages.

BY Raymond VAN DER PUTTEN

To Read the Entire Report Please Click on the pdf File Below.