by In spite of prospects for a moderate upturn, monetary policy is clearly showing its limits, with structural reforms needed to improve Japan’s economic outlook.At its latest policy meeting on November 1, the Bank of Japan (BoJ) elected to keep its “Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control” policy unchanged and did not announce any further easing measures. In addition, the BoJ revised the trajectory of its inflation projections downward to better reflect Japan’s economic reality.In essence, we believe the BoJ’s latest policy decisions further confirm the limitations that central banks face in terms of using monetary policies to boost economic growth and inflation expectations. The BoJ’s holdings of Japanese government bonds are approaching 40% of the total amount outstanding and may reach 50% by the end of 2017 at the current pace of bond purchases. As a result, the scope for expanding the BoJ’s already massive asset-purchase programme is extremely slim. In addition, various indicators suggest that the negative interest rate policy (NIRP) that the BoJ introduced in January 2016 has had a negative impact. Japanese consumers worried that their savings may shrink with negative interest rates, have chosen to reduce spending. Japanese banks’ net new lending has dropped significantly since the introduction of the NIRP.
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Dong Chen considers the following as important: Bank of Japan, Japan monetary policy, Japan quantitative easing, Macroview, negative interest rate policy
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In spite of prospects for a moderate upturn, monetary policy is clearly showing its limits, with structural reforms needed to improve Japan’s economic outlook.
At its latest policy meeting on November 1, the Bank of Japan (BoJ) elected to keep its “Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control” policy unchanged and did not announce any further easing measures. In addition, the BoJ revised the trajectory of its inflation projections downward to better reflect Japan’s economic reality.
In essence, we believe the BoJ’s latest policy decisions further confirm the limitations that central banks face in terms of using monetary policies to boost economic growth and inflation expectations. The BoJ’s holdings of Japanese government bonds are approaching 40% of the total amount outstanding and may reach 50% by the end of 2017 at the current pace of bond purchases. As a result, the scope for expanding the BoJ’s already massive asset-purchase programme is extremely slim. In addition, various indicators suggest that the negative interest rate policy (NIRP) that the BoJ introduced in January 2016 has had a negative impact. Japanese consumers worried that their savings may shrink with negative interest rates, have chosen to reduce spending. Japanese banks’ net new lending has dropped significantly since the introduction of the NIRP.
While recent data still paint a quite dismal picture of growth and inflation, our analysis suggests that growth and inflation in Japan may rise moderately going forward, helped by a rebound in commodity prices and stabilisation in the JPY. Continued recovery in the global economy will also help Japan. However, our analysis suggests that inflation in Japan will still likely fall well short of the BoJ’s recently lowered projections of -0.1% for 2016 and +1.5% for 2017.
In our view, the only way to bring sustainable improvement in Japan’s economic outlook is through structural reforms. Without growth in productivity and measures that alleviate Japan’s acute labour shortage, it’s hard to imagine how Japan can achieve the kind of growth and inflation targets that the BoJ is aiming at.