The Bank of Japan (BOJ) left its monetary stimulus program unchanged as it downgraded its assessment of exports, factory output and overseas economies.
The BOJ’s decision to maintain its policy interest rates and asset purchases was predicted by all 46 experts surveyed by Bloomberg. Its gloomier take on the economy was also largely expected after a raft of weak data over the past month.
Most analysts still expect the BOJ to stay the course with policy unless there is a severe downturn or rapid strengthening of the yen. While there’s been a dovish turn at other central banks, the side effects of the BOJ’s stimulus are piling up and it has little ammunition left.
Despite the BOJ’s concerns about the economy, it doesn’t see a recession taking place –- or the need to take immediate policy action, said Harumi Taguchi, principal economist at IHS Global Insight Inc. “What’s important for the BOJ is price momentum and the positive cycle including wage growth, and those points are largely unchanged,” she said. Taguchi also noted that oil prices are rising and the yen is stable.
Since the previous BOJ meeting in January, gauges of exports and factory output have fallen, and capital investment appears to be flagging. The central bank’s key inflation index stood at 0.8 percent in January, and is expected to head towards zero in coming months. On top of all this, Japan faces a sales-tax increase in October.
The BOJ said that Japan’s economy continued to expand moderately, but the global slowdown had caused “some weakness” recently in exports and industrial production. Still, overseas economies would keep growing moderately, supporting a rising trend in Japanese exports and a further expansion of the domestic economy, it said.
The central bank is hoping to ride out the economic weakness by sticking to its current policy settings but the rough patch will no doubt put it into a tougher position, said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities. “Over the longer term, the BOJ will probably have to reconsider again what the best policy framework
is, given that it will take a
very long time to hit the price target,” she said.
Slowing growth in China, the US-China trade war and a disruptive Brexit could all still take a bigger toll on Japan’s export-dependent economy, weakening growth and underlying inflationary forces. The Organisation for Economic Co-operation and Development cut its global economic outlook earlier this month, the European Central Bank introduced a fresh round of stimulus last week and the Federal Reserve has signaled its willingness to be patient on any further interest-rate hikes.
With policy side effects piling up, there are growing calls for the BOJ to rethink its commitment to 2 percent inflation — which many economists now deem unrealistic. Finance Minister Taro Aso said things have changed since the BOJ and the government agreed to the target in a joint statement in 2013 and that sticking to it without flexibility could be problematic.