Bank of Japan keeps policy on hold

Bank of Japan keeps policy on hold

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The Bank of Japan has kept monetary policy on hold as it made slight downgrades to inflation forecasts but predicted steady economic expansion.

It kept short-term interest rates at minus 0.1 per cent, a cap on 10-year bond yields at “around zero” and pledged to carry on buying assets at a pace of ¥80tn a year as it strives to end two decades of on-and-off deflation.

The continued optimism of the bank’s inflation forecasts suggests it believes the economy is on track and there is no need for extra monetary stimulus.

“The economy is expanding steadily based on the mechanism of a positive circle from income to expenditure,” Haruhiko Kuroda, governor of the BoJ, said after the policy decision.

In its quarterly outlook report, the BoJ said that companies remained cautious on raising prices and wages. Excluding volatile fresh food and energy, prices in September were 0.2 per cent higher than a year earlier.

“Nonetheless, medium to long-term inflation expectations are projected to rise as firms’ stance gradually shifts towards raising wages and prices,” the BoJ said. “As a consequence, the year-on-year rate of change in the CPI is likely to continue on an uptrend and increase towards 2 per cent.”

The bank voted for the decision by a majority of 8-1. Goushi Kataoka, who joined the board in July, dissented. He argued that the BoJ should signal its willingness to increase stimulus if there is a delay in achieving the inflation target.

Mr Kataoka also set out for the first time how he would like to increase stimulus. He said the BoJ should cap 15-year bond yields at 0.2 per cent, expanding the central bank’s control further out along the yield curve.

Japanese government bonds with 15 years to maturity trade at yields of about 0.3 per cent.

The BoJ’s policy board lowered its forecast for inflation in the year to March 2018, excluding fresh food, from 1.1 per cent to 0.8 per cent. For the year to March 2019, it trimmed its forecast from 1.5 per cent to 1.4 per cent.

Many analysts think those numbers are too high and that the BoJ will be obliged to bring them down. Mr Kataoka is building a case that the BoJ should boost stimulus if it does so.

Mr Kuroda is responsible for the BoJ’s aggressive stimulus but has been reluctant to expand it unless forced to by weak economic data. His term as governor expires in April 2018. Prime minister Shinzo Abe, who was recently re-elected, is considering whether to give him another term.

Mr Kuroda declined to comment on the choice of a new chair at the US Federal Reserve. He said a good central banker needs to combine a clear grasp of the real economy with the capacity for logical analysis. “A good human network has also become necessary,” he said.

A rush of September data before the BoJ decision showed modest momentum in the economy. The unemployment rate was unchanged at 2.8 per cent while the ratio of open jobs to applicants also held steady at 1.52.

Industrial production fell 1.1 per cent from the previous month with weak shipments of electronic components and machinery. The figures suggest slower growth in the third quarter of 2017.


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