BoJ Silent About Rising Rates

The BoJ left monetary policy unchanged. The Bank reiterated its resolve to increase the monetary base at an annual pace of about JPY 60-70 trillion. The Policy Board was more positive about the recovery. However, it did not comment on rising JGB rates or other financial market developments.

Today, the Policy Board of Japan concluded its monthly meeting. The statement released after the meeting was almost identical to the previous one on May 22. The policy stance was left unchanged. The Board reiterated its resolve to increase the monetary base at an annual pace of about JPY 60-70 trillion. JGB holdings will be increased at an annual pace of about JPY 50 trillion and the average remaining maturity of the Bank’s JGB purchases will be about seven years.

More Positive
The main difference in the statement with the previous one is that the Board has become more positive about the economic development. It noticed that the “economy has been picking up”, whereas in the previous statement, the Board only noted that it “had started to pick up”. This is hardly news. Yesterday, the Cabinet Office revised upward GDP growth in Q1 to 1% q/q. Moreover, surveys and business cycle indicators point to ongoing strength in Q2 (see EcoFlash Japan: Business indicators point to ongoing strength,10 June).

The objective of the BoJ’s policy is to defeat deflation. The Bank will continue its quantitative and qualitative easing to achieve the 2% inflation objective. According to most members of the Board, this could be achieved in two years.

Doubtful
Many market analysts doubt that this goal can be achieved within this short period. According to our projections, inflation could reach 2% in 2014 and 2015, but only owing to the expected hike in the VAT rate from 5% to 10% in 2015. Excluding this hike, the rate of inflation is expected to be close to 1% in 2015.

Board member Takahide Kiuchi has also expressed his dissent on this subject. He would like the central bank to adopt the 2 percent inflation target as a medium- to long-term goal, and only commit to intensive easing in the next two years. As in May, his proposal was rejected by an 8-1 majority vote.

BY Raymond VAN DER PUTTEN

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