BOJ keeps policy steady

Wednesday, 2 November 2016 00:01 - - {{hitsCtrl.values.hits}}

Reuters: The Bank of Japan held off on expanding stimulus on Tuesday despite once again pushing back the timing for hitting its inflation target, signalling that it will keep policy unchanged unless a severe shock threatens to derail a fragile economic recovery.

The BOJ maintained its view that the world’s third-largest economy will expand moderately as exports and consumption emerge from the doldrums.

But it also warned that risks to the outlook were skewed to the downside and that price momentum was weakening, an unusually bleak assessment that underscored its waning conviction of achieving the elusive inflation target.

“Such a strong emphasis on downside risks is highly unusual, and suggests that the Bank retains an easing bias,” said Marcel Thieliant, senior Japan economist at Capital Economics. In a quarterly review of its forecasts released alongside its policy decision, the BOJ pushed back the timing for hitting 2% inflation to “around fiscal 2018” – admitting that the target won’t be achieved before Governor Haruhiko Kuroda’s tenure ends in April 2018.

In July, it had said inflation will hit 2% during the fiscal year 2017, which ends in March 2018.

The central bank also cut its inflation forecasts for fiscal 2017 and 2018, blaming weak overseas demand and waning public conviction that prices and economic activity will pick up.

In a widely expected move, however, the BOJ maintained its minus 0.1% short-term interest rate target and a pledge to guide 10-year government bond yields at around zero%.

“The BOJ has settled down for a long-drawn-out war to achieve its inflation target, so a delay in meeting the timing alone would not force it into action,” said Yasunari Ueno, chief market economist at Mizuho Securities.

“The only trigger for easing could be a sharp rise in the yen. The BOJ is likely to stand pat for the coming months, barring a yen spike to 90-95 to the dollar.”

The dollar hovered around 104.80 yen on Tuesday.

While no longer an official target, the BOJ also kept a pledge to buy bonds at the current pace so its holdings rise at an annual pace of 80 trillion yen ($ 764 billion).

In the quarterly report, the BOJ warned that global uncertainties could discourage companies from raising wages, which in turn would boost consumption and prices.

Japan’s core consumer prices fell for a seventh straight month and household spending slumped in September, endorsing the central bank’s view that it will take some time for inflation to accelerate to its 2% target as the economy stagnates.

Japan’s economy expanded for the second straight quarter in April-June but many analysts expect growth to remain modest for the rest of this year, with exports and output weak on sluggish global demand.