The Bank of Japan has promised not to raise interest rates before spring 2020 as it made a series of tweaks to its massive programme of monetary stimulus.
It is the first time Japan’s central bank has put a date on the “extended period” for which it intends to keep rates low, mirroring a policy first used by the US Federal Reserve in 2011. A specific date gives markets greater certainty but with almost nobody expecting a rate rise during the next year, it is unlikely to make a substantial difference to the economy.
The BoJ’s decision, however, shows it is concerned about slowing growth and the lack of progress towards its 2 per cent inflation objective. The underwhelming scale of the action may only add to the perception that it has run out of ideas and tools for stimulus.
Two doves on the BoJ policy board, Yutaka Harada and Goushi Kataoka, voted against the move because it did not send a strong enough signal of the central bank’s commitment to reaching its inflation objective.
“The Bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, at least through around spring 2020, taking into account uncertainties regarding economic activity and prices,” the central bank said in a statement.
In an effort to improve the functioning of markets, it also relaxed collateral conditions and fees on several of its lending facilities, agreeing to accept BBB-rated corporate debt as collateral, and made it easier for market players to borrow its stock of government debt and exchange traded equity funds.
Japan’s central bank launched a massive programme of monetary easing in 2013, expanding its balance sheet to more than 100 per cent of annual economic output, and pushing overnight interest rates down to minus 0.1 per cent.
The stimulus contributed to a fall in the yen and Japan’s economy has enjoyed a six-year spell of solid growth. However, the BoJ has failed to ignite inflation, with prices up by just 0.4 per cent compared with a year ago in March.
Despite the slow progress on inflation, the BoJ’s last significant easing action was in September 2016, when it capped 10-year bond yields at around zero. Since then, it has tweaked policy to make it more “sustainable”, signalling that it is content with the current level of stimulus.
The central bank kept the cap on 10-year bond yields unchanged and held overnight interest rates at minus 0.1 per cent, in line with forecasts from all 12 economists polled by Reuters. One possible effect of the more specific guidance will be to dispel market speculation that the BoJ could abandon negative interest rates.
The BoJ signalled concern about the economic outlook, saying Japan had been “affected by the slowdown in overseas economies for the time being”, and that there are “high uncertainties regarding the outlook for economic activity and prices”.
It said its price stability target would “take time to achieve”, but insisted that inflation was “likely to increase gradually to 2 per cent” and forecast the economy would continue on a “moderate expanding trend” despite the effect of the global slowdown.
The central bank trimmed its growth forecasts for 2019 and 2020 and forecast inflation of just 1.6 per cent in the year to March 2022 — highlighting how it expects to miss its inflation target long past the period for which it has promised to hold interest rates.