BOJ retains massive stimulus program, accepts lower inflation outlook

March 17, 2015

The BoJ retained its plan to increase the monetary base by 80 trillion yen a year as expected. The bank also maintained its optimistic view on Japan’s economic recovery, but it lowered its inflation forecasts for the short-term. This acceptance of soft inflation for time being reduces the likelihood that the bank will introduce more stimulus in near-term.

The BoJ stated that “annual consumer inflation is seen moving around zero percent for the time being on declines in energy prices”, which is slightly less optimistic that the bank’s view last month that inflation will slow for now on the back of falling oil prices. Kuroda has warned that the bank will not act in response to these fluctuations in the inflation outlook in short-term, unless they change the long-term outlook for consumer prices.

From our BoJ preview:
There are two main reasons why the bank is content to leave policy untouched at the moment. Firstly, Kuroda told the world at the end of February that “the BoJ won’t respond to oil price moves themselves but will closely monitor how they affect inflation expectations”. This basically means that the bank won’t respond to short-term fluctuations in prices but will act if inflation expectations are materially weakened over the long-term. Secondly, the BoJ likely wants to see the results of this springs wage negotiations before committing to further easing.

The BoJ can afford to remain on the sidelines as long as it can argue that depressed inflation in Japan is due to oversupply in the oil market, as opposed to a lack of consumer and business confidence domestically. Also, the bank is confident that wages will begin to pick-up as the economy improves. However, we aren’t as convinced this will happen in the near-term and more support from the BoJ may be required (see: BoJ Preview: Hold!).

Market reaction
The yen strengthened slightly on the back of today’s policy meeting at the BoJ as the bank lowered its inflation forecast. The acceptance of soft-no inflation for the time being reduces the likelihood that the bank will respond to soft inflation numbers with further stimulus. In saying that, the bank can’t keep its head in the sand forever if the inflation outlook remains depressed. In light of today’s meeting, any USDJPY strength in the near-term may have to come from the USD side of equation – eyes on Wednesday’s FOMC meeting!

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