Bank of Japan Monetary Policy Statement 21st September 2016

posted in: Monetary Policy, Notes | 0

The bank seeks to control the yield curve

“…the Bank decided to introduce “QQE with Yield Curve Control” …The new policy framework consists of two major components: the first is “yield curve control” in which the Bank will control short-term and long-term interest rates; and the second is an “inflation-overshooting commitment” in which the Bank commits itself to expanding the monetary base until the year-on-year rate of increase in the observed consumer price index (CPI) exceeds the price stability target of 2 percent and stays above the target in a stable manner.”

 

…By influencing both short term and long term rates

“The guideline for market operations specifies a short-term policy interest rate and a target level of a long-term interest rate…The Bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank. The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain more or less at the current level (around zero percent).”

Bond purchase program to continue at current pace

“With regard to the amount of JGBs to be purchased, the Bank will conduct purchases more or less in line with the current pace — an annual pace of increase in the amount outstanding of its JGB holdings at about 80 trillion yen — aiming to achieve the target level of a long-term interest rate specified by the guideline.”

ETFs and REITS are next

“The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 6 trillion yen and about 90 billion yen, respectively.”

Easy monetary policy will continue until inflation is sustainably above 2%

“The Bank will continue with “QQE with Yield Curve Control,” aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. The Bank will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds the price stability target of 2 percent and stays above the target in a stable manner.”

They have more options left

“With regard to possible options for additional easing, the Bank can cut the short-term policy interest rate and the target level of a long-term interest rate, which are two key benchmark rates for yield curve control. It is also possible for the Bank to expand asset purchases as has been the case since the introduction of QQE. Moreover, if the situation warrants it, an acceleration of expansion of the monetary base may also be an option.”

Their outlook going forward: A moderately expanding Japanese economy

“…sluggishness is expected to remain in exports and production for some time, and the pace of economic recovery is likely to remain slow. Thereafter, domestic demand is likely to follow an uptrend, with a virtuous cycle from income to spending being maintained in both the household and corporate sectors, and exports are expected to head toward a moderate increase as overseas economies move out of their deceleration phase. Thus, Japan’s economy is likely to be on a moderate expanding trend. The year-on-year rate of change in the CPI is likely to be slightly negative or about 0 percent for the time being, due to the effects of the decline in energy prices, and, as the underlying trend in inflation steadily rises, accelerate toward 2 percent.”
Full transcript at: http://www.boj.or.jp/en/announcements/release_2016/k160921a.pdf