Daily Times

Japan’s central bank revised down inflation forecasts on Tuesday, making only minor tweaks to a monetary policy that has so far fallen short of lifting prices and boosting the world’s third-largest economy.

There was widespread speculation in the run-up to the Bank of Japan’s two-day meeting that it would adjust its ultra-loose policy, seeking to offset the effects of negative interest rates and its massive bond and asset buying.

But the bank offered only marginal adjustments to its policy, introducing some flexibility, and revised down further its forecasts for inflation through fiscal 2020.

The BoJ has struggled for years to reach the 2.0 inflation rate thought necessary to turbocharge Japan’s economy, and has defended its decision to maintain its monetary easing even as other central banks tighten policy.

Analysts said the bank had defied those expecting major shifts as a possible precursor to a tightening of policy.

“Despite the adjustment, the statement indicates the Bank of Japan is still sticking to the status quo,” said Masakazu Satou, senior analyst at Gaiame Online.

The bank has faced criticism for the side effects of its policy, including concerns that its massive purchases are skewing the bond market and financial markets.

In a nod to those concerns, it said it would seek to keep yields on benchmark 10-year government bonds around zero percent, but added “the yields may move upward and downward to some extent” and said it would “conduct purchases in a flexible manner”.

The bank also said it would shift its purchases of exchange-traded fund away from the Nikkei towards the Topix exchange, to address concerns it is inadvertently hiking stock prices, and could “increase or decrease the amount of purchases depending on market conditions”.

‘Deflation mindset’

The BoJ’s aggressive monetary easing has been the key weapon in the battle against deflation, but the central bank has been forced to regularly abandon deadlines for the 2.0 percent goal.

Earlier this year, it dropped a 2020 target for the figure, and on Tuesday it revised down its forecasts, saying it now expected inflation for fiscal 2018 of just 1.1 percent, rising to 1.5 percent in fiscal 2019 and 1.6 percent for fiscal 2020.

Experts say several factors are keeping prices low, including stagnant salaries.

“The primary reason for weak inflation in Japan to me is that salaries don’t rise,” said Taro Saito, senior economist at NLI research institute.

“Workers’ demand for a rise in salaries has not been very strong because your level of living isn’t changing if prices aren’t rising,” he added.

The BoJ has referred to a “deflation mindset” under which consumers and employers have gotten used to the status quo.

“The mindset and behaviour… became embedded in the economy, and it has been taking time for these factors to change,” it said in a quarterly report on the economy and prices.

With inflation stubbornly low, the BoJ has kept its easing in place even as the US Federal Reserve and European Central Bank have tightened policies. But some analysts said Tuesday’s tweaks, while minor, suggested the start of a shift in thinking.

“We were surprised to see so many adjustments in the statement, but all-in-all the Bank of Japan still sent a message saying it will continue its current easing policy,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

“The adjustments were minor but this may be the beginning of a major shift. When history changes, it always begins with a minor change.”

Published in Daily Times, August 1^st 2018.