By Harumi Taguchi, Principal Economist, IHS Global Insight
Key Points:
- The BOJ maintained its monetary policy today, holding off on further quantitative and qualitative monetary easing and left unchanged negative interest rates.
- It also moved specific funds related to the restorations and rebuilding of areas affected by the Kumamoto Earthquake into its zero-interest-rate category.
- The amount of outstanding exchange-traded funds (ETFs) holdings will increase by JPY300 billion as part of a program for purchasing ETFs that are composed of stocks issues that are proactively invested in physical and human capital.
- The BOJ revised down its outlook for economic growth through to fiscal year (FY) 2017, mainly reflecting weaker exports due to the slowdown in overseas economies. However, a recovery of global economy, construction demand toward the 2020 Olympics and accelerating budget use by the government are expected to contribute to a recovery in FY2017.
- The BOJ’s inflation outlook also softened, due largely to downward revisions to projections for GDP growth and wage developments. The BOJ now expects the year-on-year change in the consumer price index (CPI) will fall behind and not turn positive until the beginning of FY2017.
- Nevertheless, the BOJ maintains its outlook for CPI growth of around 2% during FY2017 because it expects upside from a recovery of economic activities (despite weaker recovery for utilization rate of the manufacturing sector) and tight labor demand will help wage increase with offsetting downside from low import prices.
Outlook
Although the trend for exports improved somewhat, weaker demand and yen strengthening are likely to suppress a recovery of exports over the near term. Plant shutdowns due to aftershocks of the Kumamoto earthquake could also weigh on exports over the near term. Japan’s trade balance showed improvement, and a narrow-based surplus is likely over the near term, owing to low oil prices and other commodity resources. That said, the downside from yen strengthening to exports (at first in prices, but later in volumes) could limit further improvement with weakening demand remaining a concern.