Strong Sign of Confidence in Japan's Economic Recovery
The BOJ has been making signals for some time that it is confident Japan's economy has emerged from deflation and the the current economic recovery is self-sustainable, even as it approaches the longest economic expansion in post-war history, which to date was the Izanagi Keiki in the "go-go" 1960s.
The Japanese media is reporting that the BOJ will up its target for s-t rates by 25bps from the current zero (ZIRP) policy and will raise the official discount rate, which these days is essentially an afterthought underscoring efforts to nudge rates in the direction that the BOJ would like.
An overview of what is going through the BOJ's mind these days is as follows.
Bank of Japan—Main Objective now is Price Stability
?From March 2006, monetary policy framework changed from policy commitment to
quantitative easing to “understanding medium-term and long-term price
?The Bank is examining economic activity from two perspectives:
(1) Economic activity and the outlook for prices 1~2 years in advance.
(2) Long-term risks as relevant to monetary policy in terms of realizing
sustainable growth and price stability.
The basic benchmark for the Monetary Policy Committee is the quarterly Outlook for Economic Activity and Prices. In policy committee notes, the committee members indicated that:
(1) Japan’s economy continues to recover/expand steadily, but expected growth will only be slightly above potential growth for the foreseeable future.
The BOJ's Assumptions are,
a) exports will likely continue to increase,
b) corporate performance is likely to continue strong.
c) the positive influence of the strength in the household sector is likely to
become more evident (increasing wages and employment, which are lagging
indicators) with steady increase in private consumption including housing
d) accommodative financial conditions to support private demand.
In addition, the price environment will change gradually, and the Bank is presently comfortable with exchange rate levels, which are within company forecast ranges (Tankan survey). They will however be watching the trend of real GDP growth vis-à-vis gap with real short-term interest rates.
On the other hand, the MOF and Cabinet Office observers who attend each monetary policy meeting but are not allowed to vote on monetary policy want; a) the BOJ to maintain zero interest rates, and b) want the BOJ to exercise more caution in lowering current account balances.
From the BOJ's quarterly outlook that forms the backdrop for monetary policy, the BOJ sees the following potential risks.
?Growth path of global economy. Growth of major trading partners should continue at
potential growth rates
?Possible inventory adjustments (IT sector risk in particular)
?Further (over?) acceleration of business investment
?Positive output gap (growing demand-pull inflationary pressures)
?Excess demand (no output gap) may cause larger swings in GDP, causing larger
fluctuations in prices.
FY2006 and FY2007 Projections
Real GDP Domestic CGPI Core CPI
FY2006 +2.1%~3.0% +1.4%~1.8% +0.6%~0.6%
(vs Oct. 05)+1.6%~2.2% +0.5%~0.8% +0.4%~0.6%
FY2007 +1.8%~2.4% +0.8%~1.1% +0.7%~0.9%
Note: the above are the median forecasts of all monetary policy board members