On Wednesday the Bank of Japan released a monetary policy statement which showed the central bank’s massive stimulus program was kept unchanged as widely expected.
The BoJ committed to continuing its massive stimulus measures by purchasing more government bonds in order to increase the monetary base at a pace of 80 trillion yen a year. These stimulus measures were renewed last month when the Bank surprised markets by announcing its decision to expand its quantitative easing program from 60-70 trillion yen.
In its statement, the BoJ maintained its view that Japan’s economy was recovering moderately, although this week’s soft GDP figures may pressure the Bank to cut growth forecasts in January. Meanwhile, BoJ Governor Haruhiko Kuroda warned that core CPI may briefly slip below 1%. This is well below the BoJ target of 2%. Moreover, Shinzo Abe’s decision on Tuesday to delay the sales tax increase by a year-and-a-half to April 2017 puts the BoJ in a difficult position since it would mean that the Bank’s monetary easing might be encouraging the country into further debt. The first sales tax was launched on April 1st of this year and the second tax increase (to 10% from 8%) was initially scheduled for October 2015.
In a press conference following the BoJ policy announcement, Governor Kuroda urged the government to meet its fiscal target.
“Fiscal discipline is the responsibility of the government and parliament, not that of the central bank,” Kuroda said to the media today.
Kuroda also mentioned that the government should abide by last January’s agreement with the BoJ. In this agreement, the government pledged to take measures to deal with the economy’s financial troubles and in return the BoJ promised to take responsibility for meeting its inflation target.
However, the Japanese Prime Minister decided to delay the unpopular sales tax hike in an announcement on Tuesday, while also saying he will dissolve the lower house of parliament on Friday. Elections are planned for December 14. This is well ahead of the end of the 4-year term that would have ended on December 2016.
With Abe’s ratings at around 50% in most surveys and the opposition weak, he judged that calling an early election would be safer than waiting, as his unpopularity grew following a string of weak economic data, scandals in his cabinet and a surprise monetary easing by the BoJ last month.
The yen fell across the board while the Nikkei rose on the news that the Japanese PM confirmed the decision to delay the tax hike which fuelled speculation of more stimulus measures in the future. The yen reached a fresh 7-year low of 117.64 against the dollar in Wednesday’s European session trading.