Policy intact
The BoJ wrapped up its two-day monetary policy meeting with a decision to leave monetary policy intact, ie to conduct money market operations so that the monetary base (the BoJ’s “quantitative target”) will increase at an annual pace of about 60-70 trillion yen (13-15% of GDP). With regard to asset purchases, it said it will continue with the following guidelines:
1) Japanese government bonds (JGBs): Purchase so that their amount outstanding will increase at an annual pace of about 50 trillion yen (10% of GDP), and that the average remaining maturity of the Bank’s JGB purchases will be about seven years.
2) Exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs): Purchase so that their amounts outstanding will increase at an annual pace of about 1 trillion yen (0.2% of GDP) and about 30 billion yen respectively.
3) CP and corporate bonds: Continue with purchases until their amounts outstanding reach 2.2 trillion yen and 3.2 trillion yen respectively by end-2013; thereafter, it will maintain those amounts outstanding.
Policy Board member Kiuchi proposed that “the Bank will aim to achieve the price stability target of 2 percent in the medium to long term and designate quantitative and qualitative monetary easing as an intensive measure with a time frame of about two years,” but this was defeated by an 8-1 majority vote. This proposal essentially expresses opposition to the current monetary policy framework “to continue with quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner.” At this stage, it is difficult to confirm that the CPI will rise by 2% y/y in a stable manner (ie, with a rise in wages) backed by various growth strategies. In this context, Mr Kiuchi’s proposal might be viewed as an expression of his concern that accommodative monetary policy will continue to be extended without limit.
Economic assessment revised up; outlook unchanged
The BoJ revised up its economic assessment to “has started picking up” from the previous meeting’s (26 April) “stopped weakening and has shown some signs of picking up.” It said that exports “have stopped decreasing,” that business fixed investment “appears to have stopped weakening,” that public investment “has continued to increase,” that housing investment “has generally been picking up” and that private consumption “has seen increased resilience.” We agree with this assessment.
With regard to the outlook, the BoJ reiterated that “Japan’s economy is expected to return to a moderate recovery path.” Under such conditions, it said “some indicators suggest a rise in inflation expectations.” Although the report does not specify those indicators, it presumably refers to break-even inflation and the Cabinet Office’s consumer trend survey.
Risk assessment: No mention of interest rate volatility
Market participants generally expected the BoJ to leave monetary policy intact, but also seemed to look for some kind of response to the recent volatility in long-term interest rates. There was no mention of the issue in the “Statement on Monetary Policy” released immediately after the MPM, but given the interest in the BoJ’s view on the matter we expect it to be brought up during Governor Kuroda’s press conference at 15:30 JST.
While the Policy Board decides on the monetary policy framework, it is the BoJ’s Financial Markets Department that handles practical matters related to operations and the financial markets. In this sense, it may be understandable that the “Statement on Monetary Policy” did not mention the volatility in interest rates. Or perhaps the BoJ believes long-term rates should eventually stabilize at low levels as it continues to increase its balance of long-term JGBs at a pace of about JPY50trn/year. In any case, the focus now turns to Mr Kuroda’s press conference.
Barclays