Bank of Japan tweaks monetary policy with inflation target distant

The first policy change in nearly two years came as the central bank expects a prolonged fight to achieve its 2 per cent inflation target

PUBLISHED : Tuesday, 31 July, 2018, 4:23pm
UPDATED : Tuesday, 31 July, 2018, 4:29pm

Japan’s central bank revised down inflation forecasts on Tuesday, making only minor tweaks to a monetary policy that has so far fallen short of lifting prices and boosting the world’s third-largest economy.

There was widespread speculation in the run-up to the Bank of Japan’s two-day meeting that it would adjust its ultra-loose policy, seeking to offset the effects of negative interest rates and its massive bond and asset buying.

But the bank offered only marginal adjustments, introducing some flexibility, and revised down further its inflation forecasts through fiscal 2020.

The BOJ has struggled for years to reach the 2.0 per cent inflation rate thought necessary to turbocharge Japan’s economy, and has defended its decision to maintain its monetary easing even as other central banks tighten policy.

At a press conference, BOJ Governor Haruhiko Kuroda acknowledged that the inflation goal would not be met in the next few years, but declined to give a new timeline.

“Like other central banks, we do not indicate detailed schedules,” he said.

“Maintaining the momentum will lead to achieving the 2.0 per cent target as early as possible. I think that the momentum towards the 2.0 per cent is firmly maintained.”

Analysts said the bank was standing by its easing policy and the shifts were intended to shore up the programme by offsetting negative side effects.

“Despite the adjustment, the statement indicates the Bank of Japan is still sticking to the status quo,” said Masakazu Satou, senior analyst at Gaiame Online.

The bank has been criticised for the consequences of its policy, including concerns that its massive purchases are skewing the bond market and financial markets.

In a nod to those concerns, it said it would seek to keep yields on benchmark 10-year government bonds around zero per cent, but added “the yields may move upward and downward to some extent” and said it would “conduct purchases in a flexible manner”.

The bank also said it would shift its purchases of exchange-traded funds away from the Nikkei towards the Topix exchange, to address concerns it is inadvertently hiking stock prices.

The BoJ’s aggressive monetary easing has been the key weapon in the battle against deflation, but the central bank has been forced to regularly abandon deadlines for the 2.0 per cent goal.

Earlier this year, it dropped a 2020 target for the figure, and on Tuesday it revised down its forecasts, saying it now expected inflation for fiscal 2018 of just 1.1 per cent, rising to 1.5 per cent in fiscal 2019 and 1.6 per cent for fiscal 2020.

Experts say several factors are keeping prices low, including stagnant salaries.

“The primary reason for weak inflation in Japan to me is that salaries don’t rise,” said Taro Saito, senior economist at NLI research institute.

“Workers’ demand for a rise in salaries has not been very strong because your level of living isn’t changing if prices aren’t rising,” he added.

The BOJ has referred to a “deflation mindset” under which consumers and employers have got used to the status quo.

“The mindset and behaviour … became embedded in the economy, and it has been taking time for these factors to change,” it said in a quarterly report on the economy and prices.

With inflation stubbornly low, the BOJ has kept its easing in place even as the US Federal Reserve and European Central Bank have tightened policies.

But some analysts said Tuesday’s tweaks, while minor, suggested the start of a shift in thinking.

“We were surprised to see so many adjustments in the statement, but all-in-all the Bank of Japan still sent a message saying it will continue its current easing policy,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

“The adjustments were minor but this may be the beginning of a major shift. When history changes, it always begins with a minor change.”