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Bank of Japan Leaves Rates Unchanged, Raises Growth Forecasts

Wednesday 22nd January 2020

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Haruhiko Kuroda trod a cautious line on the economy Tuesday despite the Bank of Japan’s stronger growth forecasts, in remarks likely aimed at pushing back early speculation that the central bank’s next move will be to start normalizing policy. Speaking after the BOJ left its interest rate settings and asset buying targets unchanged, Kuroda emphasized that the overseas risks threatening momentum in Japan’s economy and prices still remained even after the U.S.-China phase one trade deal removed one of the biggest uncertainties from the immediate horizon.

The central bank also lowered all its inflation forecasts in another move that might help lower expectations of any near-term move to reel in its stimulus. Still, some BOJ watchers were left baffled at how the bank could square stronger growth with weaker prices. That’s a combination that casts doubt on how economic growth feeds into prices at a time when central bankers around the world are reassessing the effectiveness of their targets and methodology.

The stand-pat decision came ahead of meetings by the European Central Bank and the Federal Reserve this week and next. The ECB is expected to launch a year-long examination of its inflation target and wider themes such as inequality and climate change. The Fed already has a broad-ranging review under way. All three central banks are seen sticking to a holding pattern for the time being amid signs the global economy is past the worst of a slowdown.

But Kuroda insisted this was no time to relax. He said he wouldn’t hesitate to take additional easing action if risks to the economy and prices increased. “The overseas downside risks may have eased a little from a while ago, but the level still isn’t that low,” Kuroda said. “So of course we need to continue to pay sufficient attention to those risks with a monetary policy that has a conscious easing bias.”

He said if growth picked up much faster than expected in the BOJ’s main scenario the central bank might need to discuss a change, but for now the current stance was appropriate. As had been widely expected, the BOJ raised its growth projections for the first time in a year, thanks to Prime Minister Shinzo Abe’s $120 billion economic package, unveiled last month. The bank cited the government measures as the largest factor underlying its improved growth forecasts.

While Japan’s economy is expected to have contracted sharply in the last three months of 2019 following a destructive super typhoon and a sales tax hike that cooled spending, the trajectory for this year now looks less gloomy. A slump in overseas demand may have bottomed and the Abe administration’s stimulus is set to give the economy a shot in the arm. The fiscal injection looks sufficient to help get growth back on track this year and remove the need for additional action by a central bank already stretched close to the limits of its policy toolkit and facing mounting costs of its easing program.

“Kuroda is aware that some market participants are already looking for any sign of tightening moves. He basically tried to throw cold water on them,” said Masamichi Adachi, chief Japan economist at UBS Securities. The bank doesn’t want any hint of optimism to spark a strengthening of the yen, he added. That fits in with the view of other economists who say as long as the yen doesn’t make any sharp gains, the BOJ will stay on cruise control.

The BOJ’s upgraded growth forecast of 0.9% growth in the year starting in April positions it between the lower view of private economists and the more optimistic projection of the government. Still, economists cast doubt on how growth can strengthen while prices weaken. “If you take a step back, they are forecasting inflation of only 1.4% even in fiscal 2021. That’s very weak after years of massive easing and I think it’s coming to a stage where they need to rethink the price target. I wouldn’t be surprised if that discussion takes place this year as the Fed and ECB are also discussing theirs,” said Nobuyasu Atago, chief economist at Okasan Securities and former head of the BOJ’s price statistics division.

Kuroda dodged a question on whether he envisaged achieving the target before his current term expires in April 2023. He also struggled to explain the conflicting direction of the price and growth forecasts. The impact of faster growth on prices isn’t showing up clearly in the forecast period, he said, but should theoretically be felt after a time lag. “I don’t think the BOJ or Kuroda gave a good explanation for why the inflation forecasts are down even though the growth forecasts are up. Absolutely not,” UBS’s Adachi said, adding that ordinary people would find it difficult to understand the central bank’s logic.


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