The Bank of Japan (BOJ) took a brighter view of the economy and left its main policy settings unchanged on Tuesday, offering a further indication that it is unlikely to add to its stimulus.
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. But the bank also trimmed its inflation forecasts, a move that may raise fresh questions about how economic growth feeds into prices at a time when central bankers around the world are reassessing their targets, methodology and wider issues.
The stand-pat decision came ahead of meetings by the European Central Bank (ECB) 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.
Since the BOJ’s previous meeting in December, the US and China have signed off on a phase one trade deal removing for now one of the biggest uncertainties on the horizon for the economic outlook. The yen has also weakened against the dollar, falling last week to eight-month lows after a short-lived surge at the start of January.
The central bank said that while overseas risks to the economy remained significant, they had decreased somewhat. It said it wouldn’t hesitate to take additional easing action if risks increased.
“The BOJ is trying to avoid sending a message that it’s getting confident about the economy or it’s starting to seek adjustments to its easing bias,” said Nobuyasu Atago, chief economist at Okasan Securities and former head of the BOJ’s price statistics division. “The bottom line is that the BOJ is comfortable with the current yen level and it doesn’t want to change that by indicating optimism or a change in its cautious view.”
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. The BOJ now projects the economy will expand 0.9% in the year starting in April, compared with a 0.7% forecast in October, citing the impact of the government’s measures, but expects inflation of only 1%, down 0.1 percentage point from its previous projection.
The price outlook “has hardly changed from the previous view,” Kuroda told reporters after the decision. 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.”
The BOJ’s upgraded growth forecast positions it between the view of private economists and the more optimistic 1.4% 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,” Atago said.
As the year progresses the focus is likely to shift to when the BOJ will step back from its bias toward easing to a more neutral stance, assuming no events derail the recovery. The change in guidance would be a necessary move toward contemplating an eventual normalization of policy. Most economists surveyed by Bloomberg now expect the bank’s next move to be in the direction of tightening, though the likely horizon for that would be next year.
If the global economic bottoming continues, the BOJ may be able to reverse its easing tilt, but that depends on how the Fed moves first, and whether reversing its stance would affect the yen significantly, said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance.
Still, Kuroda downplayed speculation that the bank is likely to change its policy framework or its easing bias anytime soon, saying “downside risks stemming from overseas economies have fallen somewhat from a while ago, but risk levels are not that low.”
Abe has also helped the BOJ’s circumstances by playing down the significance of continued feebleness in price growth. While movements in inflation were previously seen as potential triggers for policy action, government pressure on the central bank to achieve its 2% price goal has dissipated considerably. The prime minister didn’t even mention deflation in his inaugural speech at the start of this year’s parliamentary session on Monday.
Abe has likely calculated that calling for higher inflation risks a public backlash after the government forced up prices with the sales tax increase in October.