The Bank of Japan (BOJ) yesterday kept monetary policy steady and revised upward its economic forecast for the next fiscal year, signaling that it has for now delivered sufficient stimulus to cushion the blow from the COVID-19 pandemic.
However, the central bank warned of escalating risks to the economic outlook as new state-of-emergency measures rolled out this month hit consumption and threatened to derail a fragile recovery.
“Our projections could change depending on developments regarding the pandemic, and how they affect domestic and overseas economies. Uncertainty is therefore extremely high,” the BOJ said in a quarterly report on economic outlook.
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As widely expected, the central bank maintained its targets under yield curve control (YCC) at minus-0.1 percent for short-term rates and at about 0 percent for 10-year bond yields.
BOJ Deputy Governor Masayoshi Amamiya was absent from the meeting, because he stayed home as a precaution after a relative took a polymerase chain reaction test for COVID-19, the bank said.
In fresh quarterly projections, the BOJ upgraded the next fiscal year’s growth forecast to 3.9 percent from 3.6 percent three months ago, based on hopes that the government’s huge spending package would soften the pandemic’s blow.
It upgraded its assessment on capital expenditure, saying that it was bottoming out, and projected that exports would broadly increase, thanks to robust overseas demand.
However, it offered a bleaker view on consumption, saying that spending on services would remain under “strong downward pressure” and could add a deflationary impulse to the economy.
“Japan’s economy is picking up as a trend,” the BOJ said in the report, offering a slightly more nuanced view than last month, when it said that growth was “picking up.”
Many analysts had expected the BOJ to hold fire ahead of a review of its policy tools in March, which would aim to make them more sustainable as Japan braces for a prolonged battle with COVID-19.
The review would discuss ways to scale back the bank’s massive purchases of exchange-traded funds (ETFs) and loosen its grip on YCC to breathe life back into markets numbed by years of heavy-handed intervention, sources said.
“There is a high possibility the BOJ will slow its ETF buying,” Mitsubishi UFJ Research and Consulting Co senior economist Shinichiro Kobayashi said. “But the BOJ will do so in a way that doesn’t give markets the impression it is dialing back stimulus.”
Many analysts are also watching out for any response from BOJ Governor Haruhiko Kuroda to a media report that the bank could widen the range for which long-term yields are allowed to move around its target of 0 percent.
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