Bank of Japan view on the market – Summary

Today Bank of Japan released the economic outlook after maintaining the interest rate without change around 0%.

Below points are the most important outlook points came into Minutes Of Meeting

I. Current Situation of Economic Activity and Prices in Japan
  • Japan’s economy has been on a moderate expanding trend, although exports and production have been affected by the slowdown in overseas economies.
  • Overseas economies have been growing moderately on the whole, although slowdowns have been observed.
  • In this situation, exports and industrial production have shown some weakness recently.
  • On the other hand, corporate profits and business sentiment have stayed at favorable levels on the whole, albeit with some weakness observed in part.
  • Private consumption has been increasing moderately, albeit with fluctuations.
  • Financial conditions are highly accommodative.
  • On the price front, the year-on-year rate of change in the CPI is in the range of 0.5-1.0 percent.
  • Inflation expectations have been more or less unchanged.
II. Baseline Scenario of the Outlook for Economic Activity and Prices in Japan

A. Baseline Scenario of the Outlook for Economic Activity:

With regard to the outlook, Japan’s economy is likely to continue on an expanding trend throughout the projection period, despite being affected by the slowdown in overseas economies for the time being.

  • Exports are projected to show some weakness and business fixed investment also is likely to decelerate somewhat.
  • However, private consumption is expected to continue increasing as the employment and income situation continues to improve.
  • Public investment also is likely to increase, reflecting Olympic Games-related demand.
  • Thereafter, overseas economies expect to grow moderately on the whole with the growth rates rising somewhat.
  • Domestic demand is likely to follow an uptrend, with a virtuous cycle from income to spending being maintained in both the corporate and household.
  • Business fixed investment is likely to increase moderately amid accommodative financial conditions.
  • Private consumption also expects to follow a moderate increasing trend.
  • public investment expects to continue increasing through fiscal 2020 and thereafter maintain a relatively high level in fiscal 2021.

On this basis, Japan’s economy is likely to continue growing at about the same pace as its potential on average. Comparing the current projections through fiscal 2020 with the previous ones, the projected growth rates are more or less unchanged.

The consumption tax hike scheduled to take place in October 2019 will affect the GDP growth rates through the following two channels:

  1. The front-loaded increase and subsequent decline in demand prior to and after the consumption tax hike.
  2. A decline in real income.
B. Baseline Scenario of the Outlook for Prices:

The year-on-year rate of change in the CPI has been positive but has continued to show relatively weak developments compared to the economic expansion and the labor market tightening.

The mechanism through which the year-on-year rate of change in the CPI increases gradually toward 2 percent likely because of the following factors:

First, the output gap has widened within the positive territory on average against the background of the steady tightening of labor market conditions and a rise in capital utilization rates.

Second, medium- to long-term inflation expectations have been more or less unchanged recently.

Third, regarding import prices, the upward pressure of energy prices on the year-on-year rate of change in the CPI is likely to diminish, reflecting the past decline in crude oil prices.

III. Risks to Economic Activity and Prices

A. Risks to Economic Activity as per the Bank of Japan

The following four factors are upside and downside risks to the Bank’s baseline scenario regarding the economy:

  1. Developments in overseas economies.
  2. The effects of the consumption tax hike.
  3. Firms’ and households’ medium- to long-term growth expectations.
  4. Fiscal sustainability in the medium to long term.
B. Risks to Prices

Other than the effects of risks to economic activity, the specific factors that could exert upside and downside risks to prices are as follows:

  1. Developments in firms’ and households’ medium- to long-term inflation expectations.
  2. The responsiveness of prices to the output gap.
  3. Developments in foreign exchange rates and international commodity prices going forward.
IV. Conduct of Monetary Policy

In the context of the price stability target, the Bank of Japan assesses the aforementioned economic and price situation from two perspectives:

The first perspective involves an examination of the baseline scenario for the outlook.

The year-on-year rate of change in the CPI is likely to increase gradually toward 2 percent.

Although it is necessary to carefully examine the risks to economic activity and prices, the momentum toward achieving the price stability target of 2 percent appears to be maintained.

The second perspective involves an examination of the risks considered most relevant to the conduct of monetary policy.

With regard to the outlook for economic activity, risks are skewed to the downside, particularly regarding developments in overseas economies.

Regarding the outlook for prices, risks are skewed to the downside, especially concerning developments in medium- to long-term inflation expectations.

Examining financial imbalances from a longer-term perspective, there is no sign so far of excessively bullish expectations in asset markets or in the activities of financial institutions.

Conduct of monetary policy:

Bank of Japan will continue with “QQE with Yield Curve Control,” aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner.

As for policy rates, the Bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, at least through around spring 2020, taking into account uncertainties regarding economic activity and prices including developments in overseas economies and the effects of the scheduled consumption tax hike.

It will examine the risks considered most relevant to the conduct of monetary policy and make policy adjustments as appropriate, taking account of developments in economic activity and prices as well as financial conditions, with a view to maintaining the momentum toward achieving the price stability target.

You can read the full report here

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Hassan Hadaoui
Hassan Hadaoui
Writer and Economist
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