BoJ leaves monetary policy unchanged

The Bank of Japan held its monetary policy meeting last week on Wednesday. As widely expected, the central bank kept its interest rates unchanged including its QE operations. The central bank will also continue to purchase exchange-traded funds so that the amount outstanding will increase at an annual pace of about ¥6 trillion.

The BoJ reiterated its commitment to reaching the 2 percent inflation target rate. There were no changes to the forward guidance at last week’s meeting. The forward guidance remained unchanged from the July monetary policy meeting.

The BoJ Governor Kuroda was however seen pushing forward with the current policy unchanged. This would potentially mark the extension of Abenomics into 2019. The decision to leave policy unchanged was widely expected.

Another factor was that the BoJ meeting was just a day before Japan’s PM Shinzo Abe prepared for a victory. Abe now becomes Japan’s longest-serving prime minister.

The re-election of Abe was also seen as an endorsement of his policies which included the massive monetary stimulus program, dubbed Abenomics alongside regulatory reforms and flexibility in fiscal policies.

Abe appointed the BoJ Governor Kuroda in 2013 as the head of the Bank of Japan, and both individuals were seen as steering Japan’s economy out of years of deflation.

It has been over five years since Japan’s deflationary freefall. For monetary policy to remain aligned, both the PM Abe and BoJ Governor Kuroda are expected to work together.

Despite the meeting being a non-event last week, the markets are speculating that the Bank of Japan is already stealthily tapering its QE program. There have been many critics of the BoJ’s QE policies. Economists and some BoJ members believe that the massive stimulus program would eventually overwhelm Japan’s financial system.

A few months ago, the Bank of Japan removed the timeline for targeting inflation while keeping its commitment towards achieving the 2% inflation target rate. Inflation in Japan continues to remain stubbornly low.

However, the planned sales tax hike which is due in October 2019 is now widely expected to open the door for inflation to push closer to the BoJ’s target.

This could likely facilitate the BoJ towards exiting its monetary easing program. The Bank of Japan remains the only G7 central bank which continues to stay in the crisis-era stimulus mode.

More recently, the European Central Bank laid out plans to exit its QE program by the end of December this year. This week, the Federal Reserve will be hiking interest rates by 25 basis points in a tightening cycle.

According to some news reports, insider sources noted that the last significant policy decision was taken in July. This is seen as the first and the quiet step towards exiting the central bank’s QE program.

The BoJ is expected to maintain market stability as its primary goal while it prepares to exit from the crisis era mode.

Speaking at the post monetary policy press conference, the BoJ Governor said that it was too soon to assess the recent changes. Economic growth in Japan was seen advancing at a decent phase during the second quarter of the year.

Kuroda, however, acknowledged that the bond market functioning had improved. Kuroda also commented that regional banks had taken on more risk as the profitability continues to decline. The central bank is expected to monitor the regional banks lending strictly.

“Whether it’s monetary easing or tightening, no one wants to continue it forever,” the BoJ Governor said in the press conference.