Japan - BOJ forecasts much slower inflation but maintains policy
Published 22 January 2015
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Summary
The Bank of Japan (BOJ) revises its inflation forecast down significantly but stops short of further monetary easing. Declining oil prices will make it harder to achieve its 2% inflation target.
Detail
The BOJ met expectations and decided to keep its monetary easing policy unchanged on 21 January. The Bank will continue to purchase Japanese Government Bonds (JGBs) at a pace of 80tr yen (£448bn) per year. Simultaneously, it decided to provide a one year extension to the Stimulating Bank Lending and Growth-Supporting funding facilities that were due to expire soon . The funding capacity of the Growth-Supporting Facility has increased from 7tr yen to 10tr yen.
The BOJ reviewed its economic and inflation forecast and now sees core CPI inflation (excluding fresh food) in 2015 at 1.0%, (lower than last October’s previous forecast of 1.7% excluding VAT increase impact). Declining oil prices were cited as the main reason for the downward revision. The bank worked on an assumption that the oil price would gradually rise to US$70pb toward the end of its forecast horizon. The negative contribution of energy prices to CPI is estimated to be minus 0.7-0.8% points in 2015. The economic growth forecast was downgraded from 0.5% to -0.5% for 2014 and upgraded from 1.5% to 2.1% for 2015. The growth forecast for 2016 was revised up to 1.6% from 1.2%. The bank now forecasts inflation at 2.2% in 2016.
At his regular press conference, Governor Kuroda maintained that Japan’s economy is expected to continue its moderate recovery and that, overall, inflation is expected to rise. He reiterated that the improving output-gap and higher inflation expectations should help realise the 2% inflation target. He noted that falling oil prices should stimulate greater economic activities, which would boost longer term inflation prospects.
The market consensus sees the BOJ launching further monetary easing sometime in 2015. Most commentators continue to believe that 2% inflation has become much more difficult to achieve in the foreseeable future given the weakening oil price environment.
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