The Bank of Japan did not repeat last year’s shock to the markets when it unleashed a big boost to its QE program and instead kept monetary policy unchanged at its meeting on Friday. In October 2014, the Bank of Japan unexpectedly increased its asset purchase program by 30 trillion yen to 80 trillion yen per annum, fuelling the depreciation of the yen.
While today’s decision was expected by a majority of economists, falling inflation and stuttering growth may yet force the Bank of Japan to expand its stimulus program, despite its reluctance to increase the pace of its already massive monetary base today. Annual inflation fell to 0% in September – the lowest since May 2013. The core rate, which excludes fresh foods, was even lower at -0.1% – a dramatic turnaround from 3.0% a year ago.
The worsening inflation and growth outlook has prompted the BoJ to lower its projections once again. It now expects inflation to hit 0.1% in 2015 and 1.4% in 2016, and for economic growth to come in at 1.2% in 2015 and 1.4% in 2016. The Bank also pushed back the time frame which it expects for inflation to rise to within its 2% target. The previous time frame was the end of the first half of fiscal 2016 in September, but has now been moved back to the end of the second half of fiscal 2016.
In data released earlier today, consumer spending has also failed to hold up as the Bank of Japan had been expecting. Household spending fell by 0.4% in September from a year ago, which was significantly worse than estimates that it would rise by 1.2%. Industrial production is another key indicator that has been patchy in recent months, although it did surprise with 1% growth in September. Low unemployment is perhaps the only consistent bright spot in the Japanese economy, which remained unchanged at 3.4% in September. However, in its latest outlook report, the BoJ sounded concerned that wage growth had not accelerated enough as a result of the tightening labor market.
The decision to move back the timing for hitting the inflation target may signal that the BoJ is not planning to expand monetary policy anytime soon. However, the Bank may be waiting to see whether or not the US Federal Reserve will act in December to raise rates before making a decision itself. A fiscal stimulus by the Japanese government could also influence the central bank’s actions.
It was reported on Thursday that the Japanese government may announce a stimulus of up to 3 trillion yen to boost infrastructure projects, but it is likely to wait until after the third quarter GDP data is published on November 16.
The yen saw some volatility in currency markets after today’s data and central bank announcement as markets were confused about future policy. Speaking at the press conference after the policy decision, BoJ Governor Haruhiko Kuroda reiterated the Bank’s readiness to adjust policy if necessary and added “I don’t think there are limits to our policy options”. But market sentiment soon shifted towards no action in the near term and the yen firmed against the dollar in European trading.
The dollar recovered from a low of 120.28 yen after the decision climb to 121.48 yen. However, it fell back again when the press conference started and extended its decline to around 120.30 yen in mid-European session.