BOJ maintains stimulus as inflation lags behind growth

Bloomberg

The Bank of Japan left policy settings unchanged in the final meeting of 2017, retaining its
unprecedented monetary sti-
mulus as it waits for a pickup in stubbornly low inflation.
With Japan’s economy continuing to grow at a healthy pace, and inflation at least moving in the right direction, there is little pressure on the BOJ adjust its interest-rate and asset-purchase targets any time soon.
This sets it apart from its global counterparts, with the Federal Reserve hiking interest rates and the European Central Bank moving closer towards
policy normalisation.
Economists and investors are looking further ahead, with some speculating that the BOJ will follow some of its peers next year. While all 44 analysts surve-
yed by Bloomberg ahead of the policy meeting expected no change this month, 19 forecast tightening in 2018.
“Next year, if the current economic growth trend continues then there should be ever increasing expectations for monetary policy normalisation,” said Junko Nishioka, chief econo-
mist at Sumitomo Mitsui Banking Corporation and a former BOJ official.

REVERSAL RATE
Governor Haruhiko Kuroda said at a press briefing that the central bank didn’t need to reconsider its current policy framework. His comments last month on the “reversal rate” theory stoked speculation about an earlier policy exit. The theory posits that monetary stimulus could end up hurting commercial banks’ profitability, making them less likely to lend.
Kuroda said that financial intermediation hasn’t been impaired in Japan and that talk about the theory doesn’t indicate any need for policy change. The yen weakened following the comments and traded at 113.57 per dollar at 5:12 p.m. in Tokyo.
“Just because I brought up this academic analysis, reversal rate, doesn’t mean at all that we need to review or change the yield curve control we’ve adopted since September last year,” Kuroda said. The BOJ board’s vote was 8-1 on policy rates and unanimous on asset purchases. Goushi Kataoka, who joined
the board in July, dissented on the policy rates.
The BOJ hasn’t altered its policy framework since September 2016, when it implemented its yield-curve control program, setting an interest rate of -0.1 percent on some bank reserves and a target of around 0 percent for 10-year government bond yields. It also continues to buy enormous amounts of assets, mostly Japanese government bonds.
In a sign of how little pressure Kuroda faces to take additional action, he has been called to parliament only 19 days this year. That’s down from 51 days last year and is the fewest for any BOJ governor since 2007.
Japan’s economy is now in the longest expansion in more than two decades. Gross domestic product grew 2.5 percent in the third quarter, while confidence among large manufacturers rose to the highest level since the global financial crisis. Even so, prices excluding fresh food rose only 0.8 percent in October, well below the BOJ’s target.
In its statement, the BOJ offered a slightly more upbeat view of business investment and private consumption, and noted steady improvement in employment and incomes, but also said inflation expectations remain in “a weakening phase.”