Wed, Jan 22, 2020 - Page 10 News List

BOJ keeps interest rates, raises growth forecasts


The Bank of Japan (BOJ) yesterday took a brighter view of the economy and left its main policy settings unchanged, 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 Japanese Prime Minister Shinzo Abe’s US$120 billion economic package, unveiled last month.

However, the bank also trimmed its inflation forecasts, a move that might 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 central bank said that while overseas risks to the economy remained significant, they had decreased somewhat.

It said it would not 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 Group Inc 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 final three months of last year 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 might 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 expects the economy to expand 0.9 percent in the year starting in April, compared with a 0.7 percent forecast in October last year, citing the effects of the government’s measures, but expects inflation of only 1 percent, down from its previous projection.

The BOJ’s upgraded growth forecast positions it between the view of private economists and the more optimistic 1.4 percent 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 percent 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 [US Federal Reserve] and ECB [the European Central Bank] are also discussing theirs,” Atago said.

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