Japan: Central Bank Revamps Monetary Policy

Consensus Forecasts

In his first meeting as governor of the Bank of Japan, Haruhiko Kuroda announced moves to boost the struggling economy and beat stubborn deflation pressures. These have sent the yen tumbling. On April 4, the central bank surprised many by declaring its intent to double the monetary base over a two-year period via the aggressive purchase of long-term bonds, in response to Prime Minister Abe’s call for a 2% inflation target. The central bank will set a new framework for its asset purchases by taking focus away from open market operations (conducted in order to keep the overnight interest rate close to zero) and moving towards a monetary base focus. By expanding the amount of cash in circulation, the hope is that price increases will pick up and property and shares will become more attractive to buyers.

Latest data, which were released before the monetary policy meeting, do not lend much support towards a marked economic recovery at present. For instance, the Tankan survey of business improved in Q1 2013 from December, but it remains in negative territory. The headline index edged up to -8 in March quarter, compared to a reading of -12 in the December quarter, on the back of recent weakness in the yen. However, a negative figure continues to point to a pessimistic outlook. Meanwhile, industrial production declined by a marked 11% (y-o-y) in February as shipments and inventories both fell. This was a sharp decline from the previous reading of +5.8% in January. As for inflation, overall core CPI (which excludes fresh food) was disappointing and stayed far from the central bank’s new 2% target. Core prices declined further by 0.3% (y-o-y) in February, down from an already weak -0.2% in January and December.

You can download a sample of Consensus Forecasts G-7 and Western Europe at www.consensuseconomics.com.

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