The Bank of Japan has kept monetary policy on hold even as it revised down its growth forecasts and warned that risks to economic activity and prices were skewed to the downside.
Growth in the year to March 2021 is now expected to come in at minus 4.7 per cent while prices will fall 0.5 per cent, according to estimates by the BoJ’s nine-member policy board. The bank expects a rapid rebound in 2021 and 2022.
The BoJ’s decision to stand fast despite the weak economic outlook suggests it believes it has done all it can for now and is taking comfort from the stability of the yen against the US dollar.
“Japan’s economy has been in an extremely severe situation with the impact of Covid-19 remaining at home and abroad, although economic activity has resumed gradually,” said the central bank.
It kept overnight interest rates on hold at minus 0.1 per cent, ten-year bond yields capped at “around zero” and purchases of equity exchange traded funds steady at a pace of ¥12tn ($112bn) a year.
Under governor Haruhiko Kuroda, the BoJ began a large monetary stimulus in 2013, aimed at breaking the country free from a quarter-century of near deflation. That programme had some initial success but had largely stalled by this year, leaving Japan to tackle the Covid-19 crisis with interest rates already at rock bottom levels.
In response to the crisis, the BoJ doubled the pace of its equity ETF purchases and promised more than $1tn in liquidity to support the financial system. But overall monetary policy is largely unchanged — highlighting the need for government fiscal policy to support the economy.
Publishing its new quarterly economic forecasts, the BoJ predicted that the economy would gradually recover as businesses reopen following coronavirus shutdowns, and public fear of the virus begins to wane.
It said its outlook “is based on the assumption that a second wave of Covid-19 will not occur on a large scale”. Uncertainty about the outlook was extremely high, it said.
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The BoJ policy board voted for the decision by a majority of 8-1. Board member Goushi Kataoka dissented, arguing it was necessary to cut short- and long-term interest rates further to offset any downward pressure on prices.
“For the time being, the bank will closely monitor the impact of Covid-19 and will not hesitate to take additional easing measures if necessary,” said the central bank. “It expects short- and long-term policy interest rates to remain at their present or lower levels.”