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BOJ Keeps Policy Unchanged as It Shifts to Wait-and-See Mode

Published 09/19/2018, 12:26 AM
Updated 09/19/2018, 12:40 AM
© Reuters.  BOJ Keeps Policy Unchanged as It Shifts to Wait-and-See Mode

© Reuters. BOJ Keeps Policy Unchanged as It Shifts to Wait-and-See Mode

(Bloomberg) -- The Bank of Japan left its monetary stimulus program unchanged as it settled in to gauge the impact of its first policy adjustments in nearly two years in July.

The central bank maintained its 10-year bond yield target, asset purchases and guidance on interest rates at the end of a two-day meeting Wednesday. The result was predicted by all 51 economists surveyed by Bloomberg.

The decision leaves the BOJ even further behind its global peers, who are moving to return to pre-crisis monetary policy. The Federal Reserve is expected to raise interest rates again next week, and the European Central Bank said it planned to phase out its bond-buying by the end of the year.

Under Governor Haruhiko Kuroda, the BOJ is widely expected to stick with the current basic settings until 2020, while monitoring the build-up of side effects, the Bloomberg survey found. Inflation is only about halfway to the central bank’s 2 percent target, while a sales-tax increase scheduled for the second half of 2019 would pose a challenge to consumption and growth.

"It’s time now for the BOJ to monitor the effects of the policy adjustments it made in July," said Naomi Muguruma, a senior market economist at Mitsubishi UFJ Morgan Stanley (NYSE:MS) Securities Co. in Tokyo.

The BOJ will face challenges ahead as it tries to sustain Japan’s economic expansion and push inflation closer to 2 percent. Near-term risks include the Hokkaido earthquake, typhoons and a record-breaking heat wave. All are expected to weigh on third-quarter growth.

The BOJ’s basic view of the economy and inflation hasn’t changed, but the fact that it maintained language from July’s quarterly outlook report on trade protectionism shows that it also views the escalating trade fight between China and the U.S. as a risk, Muguruma said.

There is also the question of side effects. The changes the central bank made in July were aimed at making its stimulus more sustainable, but economists concluded the moves amounted to “stealth tapering” and wouldn’t do much about the side effects.

Koji Fujiwara, head of the Japanese Bankers Association, said last week that he wants to step up monitoring of the impact on banks given the central bank’s pledge to keep interest rates extremely low for an "extended period."

The BOJ may decide to adjust policy again in the middle of next year if it determines the recent changes weren’t enough to offset the side effects on the JGB market, said Kyohei Morita, chief Japan economist at Credit Agricole (PA:CAGR) Securities Asia.

Dissenters

Board members Goushi Kataoka and Yutaka Harada again delivered dissenting votes on yield-curve control and forward guidance on Wednesday. Both have previously called for more stimulus, if required.

Kataoka on Wednesday disagreed with the board’s view that inflation was likely to rise gradually to 2 percent, saying monetary easing should be strengthened and the central bank should commit to additional measures if it determines that medium- and long-term inflation expectations were weakening.

Abenomics

Prime Minister Shinzo Abe, asked about the risks, said last week that the BOJ’s stimulus shouldn’t go on forever, serving as another reminder that it surely must come to an end one day.

"We had Abe’s comments recently, and there’s more concern about side effects, so I think it’s becoming more the case that the BOJ wants to normalize policy if it can," said Masaki Kuwahara, senior economist at Nomura Securities Co.

Yet it appears that day won’t come soon. Abe is expected to win a ruling-party leadership election on Thursday and continue as prime minister for several more years. The BOJ’s stimulus has been a pillar of his "Abenomics" growth program, a principal reason he is poised to become Japan’s longest-serving post-war prime minister.

(Adds details, economists’ comments, dissenting votes.)

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