In one of the most optimistic assessments in the past nine years, the Bank of Japan (BOJ) described the recent weakness in inflation as a temporary phenomenon and looked confident of a sustained recovery. Keeping in line with the market expectations, it maintained the status quo on monetary policy. The bank continues with its short-term interest rate target of minus 0.1 percent and its pledge to keep the yields of 10-year government bond around zero percent.
Haruhiko Kuroda, the Governor of BOJ accepted that public perceptions of price rise in future remain subdued as the central bank of the country will significantly lag its peers in the U.S. and Europe when it comes to exit the massive stimulus program.
In its quarterly review of long-term economic and price projections, BOJ found that the nation’s economy is moving towards a moderate expansion. This is the first time since 2008 that the central bank has signalled that the recovery of the country is on an accelerated path and hence does not need any further stimulus.
The markets were expecting that the bank will now stop buying the government bonds, thus paving the way for the withdrawal of stimulus package. But the BOJ kept its loose pledge of increasing its holdings in the government banks at an annual pace of 80 trillion yen intact, thus defying all speculations. The analysts felt that it showed its optimism about the economy, but at the same time maintained its caution over the inflation outlook.
The chief market economist Yasunari Ueno at Mizuho Securities said, “The inflation and growth projections, as well as the upgrade of its economic assessment, were all in line with market forecasts, so there was no surprise at this meeting. As long as the economy maintains its momentum, the BOJ will likely stand pat at least until next spring, when Kuroda serves out his term.”
After the policy meeting, Kuroda told that currently the inflation is hovering around zero percent, but they expect it to move towards 2%. BOJ projected that the figure will be met only by the fiscal ending of March 2019. In the current fiscal, the bank feels that weak services prices will not let the inflation rise, but the tightening job market will help it rise as it will push up wages.
It’s only when this inflation figure is achieved can they talk about the specific exit strategy from its massive stimulus. Saying anything regarding that at the current moment will only lead to confusions in the market.