Monetary Status Quo

The BoJ left monetary policy unchanged. The Policy Board was more upbeat about the economy stating that it is “starting to recover moderately".

Today, the Policy Board of Japan concluded its monthly meeting. The statement released after the meeting was almost identical to the previous one on 11 June. 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.

Nonetheless the Bank of Japan was more upbeat about the economic recovery and this is the main difference with the June statement. The BoJ said that the “economy is starting to recover moderately," instead of “has been picking up” in the previous statement, using wording not used by the bank since January 2011. In particular it said that business investment has “stopped weakening” and the pick-up in housing investment “has become evident”.

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. In May, the CPI excluding fresh food (the so-called core rate, the BoJ’s preferred measure) was unchanged over the year, i.e. 0.4 point higher than in the previous month and at the zero-threshold for the first time since October 2012. The core rate for Tokyo in July, which is published one month ahead of the national index, rose to 0.2%, recording the second consecutive positive reading. This is the first time since 2009. National core inflation should move to positive territory in June.

For the third consecutive statement, the Board has noticed that some indicators suggest a rise in inflation expectations. Indeed the yield on the 10-year JGB has risen by about 30 basis points to around 0.90% since the announcement of the new monetary policy on 4 April.

However, the Board’s statement was silent on other developments in financial markets such as the rise of the Nikkei and the depreciation of the yen.

BY Giovanni AJASSA

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