JAPAN MAKES STRONG STRATEGY AGAINST MONETARY POLICIES

Monetary policy in Japan

The Bank of Japan keeps printing money at speed

NACTION may at first glance seem more timid than pulling out the monetary bazooka—but it took nerve for Haruhiko Kuroda to hold fire at the Bank of Japan’s monetary-policy meeting on October 30th. The central bank’s policy board, which Mr Kuroda effectively controls, voted 8-1 to maintain the existing programme of quantitative easing (QE, or printing money to buy bonds) at its current level of ¥80 trillion ($660 billion) a year. Given that Japan is officially back in mild deflation for the first time since 2013, when the BoJ began QE, it was a bold decision not to act. The BoJ’s mandate, after all, is to produce sustained inflation of 2%.

But Mr Kuroda kept his faith in gradually recovering growth, and in a range of measures which, he believes, suggest robust underlying price rises. In July the central bank began publishing a new index of inflation, known as “new core CPI”, which strips out both the price of energy and of fresh food. It shows prices rising at a healthy pace. In August the new gauge rose by 1.1%, and in September by 1.2% (compared to falls in core CPI of -0.1% for both months).

The BoJ duly highlighted the new index in its updated outlook for the economy and prices today. It slashed its forecast for CPI inflation (including energy) for fiscal 2015 from 0.7% to 0.1%, tweaked its prediction for fiscal 2016 and left unchanged its projection for fiscal 2017, acknowledging the greater-than-expected impact of falling oil. Mr Kuroda also postponed the bank’s deadline for achieving inflation of 2% by a further six months, until the second half of fiscal 2016.

Financial markets were dismayed by the bank’s inaction, which wrong-footed many economists who had bet that Mr Kuroda would have no option but to step up the pace of easing, either by buying Japanese government bonds more quickly or by expanding its purchases of shares via exchange-traded funds. But it will have helped Mr Kuroda that Japan is no longer the only developed country locked in a tryst with mild deflation; oil-price falls have affected several economies. 

A key worry for the BoJ in the run-up to the meeting was the effect of China’s slowdown on Japan’s economy. The bank lowered its economic growth forecasts for the next two years, chiefly due to the slowdown in emerging economies, and weak household spending following a rise in the consumption tax from 5% to 8%, last spring. Data on industrial production out this week were unexpectedly robust, partly easing fears that the economy might have slipped into a technical recession in the third quarter after a contraction in the second. 

The decision not to ease suggests closer co-ordination of policy between the BoJ and the government of Shinzo Abe, the prime minister, than in the recent past. Economists close to Mr Abe had sent signals that further easing was unnecessary. Mr Kuroda’s surprise decision a year ago to boost monetary easing, from ¥60-70 trillion to ¥80 trillion, displeased the prime minister’s office, because Mr Kuroda appeared to be pressing the government into going ahead with a second rise in the consumption tax, which in the end Mr Abe postponed. 

Policymakers at the BoJ are also more aware of the risks associated with expanding monetary easing than they were a year ago. A weaker yen constrains consumer spending and raises costs for small- to medium-sized businesses. The bank recognises that the scale of its QE purchases is stifling the world’s second-largest sovereign debt market. None of that, however, will dent financial markets’ expectation that weak growth and sluggish prices will make further easing inevitable in the months to come.