Fri, Dec 21, 2018 page10

• BOJ votes for no changes as risks to growth mount

  • Bloomberg
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  The Bank of Japan (BOJ) yesterday left its stimulus settings unchanged at its final policy meeting of the year in the face of rising risks to inflation, just hours after the US Federal Reserve signaled a slightly more dovish rate path.

  The bank kept its yield curve-control program and asset purchases unchanged, it said in a statement, a result predicted by all 49 economists surveyed by Bloomberg.

  The Japanese central bank faces a deteriorating environment. With oil prices tumbling, economists see inflation falling toward zero in the year ahead.

  Slowing growth in China, the US-China trade war and a disruptive Brexit could all hit Japan’s export-dependent economy, which has contracted in two of the past three quarters.

  BOJ Governor Haruhiko Kuroda acknowledged that risks tilted to the downside, but said that Japan’s economic fundamentals remain solid and momentum toward the 2 percent price target is maintained.

  Speaking at a news conference later, Kuroda also said that the bank has more tools for adding stimulus if needed — including rate cuts and asset purchases -—and that it is no problem if government bond yields fall into negative territory, so long as the move reflects economic fundamentals and yields remain within the bank’s target range.

  Japanese stocks yesterday entered a bear market, with the TOPIX falling another 2.5 percent as statements from the BOJ and Fed failed to soothe investors.

  Benchmark 10-year bond yields this week fell to 0.01 percent, the lowest since September last year.

  While BOJ officials might be fine with yields hitting zero percent or below, sub-zero yields for an extended period would again elevate concerns about profits at Japanese banks. Eroded bank profitability was a key reason that the central bank introduced yield-curve control in 2016.

  The bank repeated its previous assessment that Japan’s economy is likely to continue expanding moderately, supported by moderate growth in exports and an uptrend in domestic demand.

  Core inflation is about 1 percent and likely to gradually increase toward 2 percent, it said.

  “With a rising level of cautiousness, which was shared by the Fed, the BOJ will be in wait-and-see mode for a while,” said Junko Nishioka, chief Japan economist at Sumitomo Mitsui Banking Corp and a former BOJ official. “They are well aware that it’s not time to signal any policy normalization.”

  The vote on the rate decision was 7-2, with Goushi Kataoka and Yutaka Harada dissenting.

  Kataoka again said that heightening uncertainties regarding economic activity and prices warranted action to push long-term yields lower.

  Harada said that the trading range for yields was too ambiguous a guide for market operations.

  After more than five years and US$3.5 trillion of asset purchases, inflation remains only halfway to the BOJ’s goal, as wage growth remains stubbornly sluggish.

  The Fed’s more cautious stance on future rate increases will complicate matters for the BOJ, which must be mindful that any clear signal of policy normalization, particularly if the Fed seems poised to hit pause, could cause the yen to quickly gain unwanted strength.

  Compared with October, fewer economists this month expect tightening of policy next year, the Bloomberg survey found.
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