The Bank of Japan board left its medium-term price outlook vague by saying the annual inflation rate will reach “around” 2% “around” the middle of its new three-year projection period, which means sometime between April 2015 and March 2016, according to the bank’s semi-annual Outlook Report released Wednesday.
In the report, the BOJ again highlighted the weakness of emerging market economies, which is posing the largest threat to Japan’s exports in the coming six months, when domestic demand needs support from external demand in order to keep driving above-potential high economic growth following the April sales tax hike.
The nine-member board left its median forecasts for growth and inflation nearly unchanged from its projections made in January, when it provided an update to the October report, repeating that upside and downside risks are “balanced.”
The BOJ continued to say its “quantitative and qualitative monetary easing”
— massive injections of cash into the financial markets and buying large
amounts of financial assets from lenders — has had intended stimulative effects since it launched the program in April 2013.
Under the program, “upward pressure on nominal long-term interest rates has been contained while inflation expectations have been rising on the whole, and thus real interest rates have continued to decline,” it said.
“The amount outstanding of bank lending has been increasing moderately. Stimulative effects of such accommodative financial conditions on private demand are likely to strengthen as economic activity improves,” it added.
The following are the key points from the report issued after the bank’s one-day policy meeting on Wednesday, when the board voted unanimously to maintain the bank’s policy target — doubling the monetary base in about two years from the end of December 2012. The BOJ basically repeated those points made six months ago.
BOJ: Japan can hit 2% inflation around the middle of its new projection period (between fiscal 2014 and fiscal 2016)
BOJ: Emerging economies likely to lack momentum for a while
BOJ: Upside, downside risks to growth “balanced,” risks to prices “largely balanced”
BOJ repeats: No signs of Japan asset price bubble
BOJ: Longer-term inflation expectations to rise to 2%
BOJ: To keep easy policy until 2% inflation well anchored
BOJ: To watch risks, conduct monetary policy as appropriate
In analyzing risks, the BOJ pointed to the lingering uncertainty about overseas economies.
“The Chinese economy is likely to continue to see stable growth, albeit at a slightly slower pace, as authorities carry out policy measures to support economic activity while progressing with structural reforms,” it said.
In October last year, the BOJ said uncertainty about the Chinese economy was “high with respect to effects of the structural problems of excess production capacity and excess debt.”
In the latest report, the BOJ said, “Other emerging and commodity-exporting economies will likely continue to lack momentum for the time being, but they are expected to gradually increase their growth rates due to positive effects of recovery in advanced economies, on the assumption that global financial markets remain generally stable.”
Six months ago, the bank said, “Other emerging and commodity-exporting economies, some of which are facing structural problems such as current account deficits, warrant attention together with developments in the global financial markets.”
The BOJ also said the public’s inflation expectations are unpredictable; it could slip again or rise too fast, being influenced by many factors including the two-step hike in the sales tax in April 2014 and October 2015.
But the BOJ is sticking to its standard scenario in conducting aggressive monetary easing aimed at overcoming years of deflation.
The BOJ continued to project that the year-on-year increase in core CPI excluding the direct impact of sales tax hikes will be around 1.25% “for some time” before showing a rising trend again from the second half of the current fiscal year and reaching “around 2% around the middle of the projection period.”
“Therefore, Japan’s economy is expected to gradually shift to a growth path that sustains such inflation in a stable manner.”
“With regard to the baseline scenario for economic activity, upside and downside risks can be assessed as being balanced, although uncertainty remains high, including that regarding developments in exports,” the bank said.
“Risks on the price front also can be assessed as being largely balanced, although considerable uncertainty surrounds developments in medium- to long-term inflation expectations.”
The BOJ’s view on asset bubbles also remains unchanged from the previous report.
“Examining financial imbalances from a longer-term perspective, there is no sign at this point of excessively bullish expectations in asset markets or in the activities of financial institutions,” it said.
“Nevertheless, in a situation where the amount outstanding of government debt has shown a cumulative increase, due attention needs to be paid to the fact that financial institutions’ holdings of government bonds have remained at an elevated level, although they recently have been declining.”
As for its policy outlook, the board basically repeated the recent remarks by BOJ Governor Haruhiko Kuroda — Japan is on track toward 2% inflation and that the bank will keep its easing stance until 2% inflation is well anchored.
“The bank will continue with quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2%, as long as it is necessary for maintaining that target in a stable manner.
“It will examine both upside and downside risks to economic activity and prices, and make adjustments as appropriate.”