BOJ Sits Tight on Policy, Offers More Clarity on Projections

The Bank of Japan left its monetary stimulus untouched Wednesday, while painting a gloomier picture of the economy this year as it signaled it doesnt see a quick recovery from the pandemic.

The BOJ kept its short-term interest rate at -0.1%, its 10-year yield target around zero and left its asset purchases unchanged. Some 96% of economists surveyed before the decision predicted the central bank wouldnt add to its stimulus at the meeting.

The bank released updated price and growth projections with median forecasts, having skipped pinpoint figures in April. The latest predictions point to a deeper slump this year, but suggest a slightly faster pickup in the following years.

Earlier this month, people familiar with the matter said the board doesn‘t see a need to act further at this point as financial markets are relatively calm and businesses aren’t facing severe funding problems. Recent data also signal the recession likely bottomed last quarter.

Even though Japan has faced a far less deadly COVID-19 outbreak than in Europe and the U.S., a recent rise in Tokyo cases continues to weigh on sentiment and inflation has fallen below zero. The countrys manufacturers are also heavily reliant on demand from markets where the pandemic rages on.

The board said it sees the economy shrinking 4.7% in the 12 months through March 2021. In April, it saw a contraction of somewhere between 3% and 5%. The return of a median projection suggests that the bank is now less uncertain about the path ahead.

On inflation, the BOJ forecast prices falling 0.5% this fiscal year, near the middle of the range given last quarter.

The bank said it still sees price growth returning next fiscal year, but doesnt see inflation rising anywhere near its 2% target for the foreseeable future -- another signal that Governor Kuroda and his colleagues are unlikely to raise interest rates before his term ends in April 2023.

What Bloombergs Economist Says

“Barring a second wave of virus infections or substantial shock to financial markets, we expect the BOJ to stay on hold for the time being.”

--Yuki Masujima, economist

Click here to read more.

The BOJ has now refrained from further policy action at its two most recent regular meetings, following a flurry of action during the early days of the pandemic when it expanded purchases of corporate bonds and stock funds, pledged to buy as much government debt as needed to keep yields low and introduced two lending programs for struggling companies.

More than 90% of economists surveyed by Bloomberg this month said the BOJ has done enough, or more than enough, so far to support the economy. Some 63% now see the bank standing pat through 2020, up from 38% just last month.

The BOJ, along with the Federal Reserve and European Central Bank, has emphasized its readiness to do more and reiterated that the immediate focus is on securing financing for companies and market stability.

Last month, the BOJ estimated the size of its two special funding programs for struggling companies at 90 trillion yen. The outstanding amount of loans under the programs was 22.6 trillion yen, according to the central bank last week. Japans bank lending rose at the fastest pace in almost three decades last month, partly due to those programs.

While bankruptcies rose 6.3% in June from a year earlier and unemployment increased to 2.9% in May, the figures suggest that central bank and government efforts are helping to limit the damage from the crisis. The uptick in the jobless rate is far smaller than the spikes seen in other developed economies.

Still, the BOJ will continue monitoring the impact of Covid-19 on businesses, especially smaller ones that employ most of Japans workforce.

“A number of companies may not be able to absorb the shock from a decline in revenues,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “To prevent bankruptcies and unemployment, the BOJ will need to continue to take action for the funding of companies and the stability of financial markets.”

For now, the BOJ still has scope to inject more money into markets without changing its policy. Its purchases of exchange traded funds were just under an annualized pace of 7 trillion yen last month, far from its ceiling of 12 trillion yen, Bloomberg calculations show.

The BOJ held 4.3 trillion yen of commercial paper and 4.4 trillion yen of corporate bonds as of July 10; both holdings are less than a half of the central banks raised limits.

— With assistance by Yoshiaki Nohara

(Adds more forecast details, figures on assets and loans, economist comment)