BoJ Holds Policy Steady as Inflation Expectations Turn Flat

The central bank maintained its easy monetary policy as it downgraded its outlook on inflation, noting that Japan would be lagging behind the U.S. and the Eurozone which move closer towards tighter monetary policy conditions.

As expected, the Bank of Japan left the short-term interest rates unchanged at -0.10% and maintained its support to keep the 10-year Japanese Government Bond yields around zero percent.

Investors continue to look for clues from the Bank of Japan on how long it would keep its current monetary policy unchanged while price growth continues to remain weak. The BoJ had, in one of its previous policy decisions removed the time frame for achieving the inflation target. This was followed up by the latest meeting where the central bank downgraded its inflation outlook.

The BoJ’s policy sits in stark contrast to that of its peers from the ECB and the Federal Reserve in the U.S. The ECB had previously announced its decision to wind up the QE program by December 2018. Meanwhile, the U.S. Federal Reserve continues to hike interest rates signaling that a fourth-rate hike could be expected this year.

The Fed has also started to unwind the asset purchases that it began in the crisis-era to stimulate the economy.

In its monetary policy statement, the Bank of Japan noted that consumer prices were in subdued, staying in a range of 0.5% – 1.0%. This was seen to be dovish considering that the central bank had previously noted that consumer prices were around 1.0%.

The central bank remained cautious in its assessment of reaching the 2% inflation target rate. It said that inflation expectations continued to remain flat.

The central bank also maintained its view on the economy noting that the economy was expanding at a moderate pace. Officials were unfazed by the weak economic report that came out for the first quarter. Officials blamed the first quarter contraction on the economy on temporary factors and expect growth to pick up towards the second quarter of the year.

Japan’s economy in the first three months of the year had contracted 0.6%, putting an end to an impressive quarter over quarter growth. Despite the declines, many economists argue that growth could bounce back in the second quarter driven by higher exports and increased capital expenditure.

The slow pace of exit from its crisis-era policy puts the Bank of Japan in a tight spot with not much of policy tools left in case of another downturn in the economy, contrary to the policy decisions made by the ECB and the Fed.

Previously, growth in Japan was led by an increase in global exports which continued to underpin an uptick in growth in the global economy.

Consumer prices in Japan increased 0.7% in April on an annualized basis. This was a second consecutive month of a slowdown in price pressures which cast questions on the BoJ’s ability to guide the economy through a recovery.

With inflation staying weak, BoJ officials are likely to look more closely on the structural factors that could be seen holding growth back.

Besides the apparent weakness, the U.S. trade policies under the Trump administration are also expected to hit growth globally. President Trump had threatened to impose tariffs on automobile imports which could hit Japan’s exports.

Recently, the International Monetary Fund had cautioned that Trump’s import tariffs could undermine the global economy resulting in retaliatory moves by other nations which could in turn damage the U.S. economy.