(Bloomberg) — The Bank of Japan left rates unchanged Tuesday and painted a brighter picture of the economic outlook, offering a further indication that the likelihood of additional stimulus has receded.
The central bank maintained its targets for interest rates and asset purchases, an outcome forecast by all 42 economists surveyed by Bloomberg. The BOJ also raised its growth projections for the first time in a year, as had been widely expected, thanks to Prime Minister Shinzo Abe’s $120 billion economic package unveiled last month.
The stand-pat decision comes ahead of meetings by the European Central Bank later this week and the Federal Reserve next week. The gatherings kick off a year that is likely to see all three central banks sticking to a holding pattern for the time being amid signs the global economy is past the worst of a slowdown.
Since the BOJ’s previous meeting in December, the U.S. and China have signed off on a phase one trade deal removing for now one of the biggest uncertainties on the horizon for the economic outlook. The yen has also weakened against the dollar, falling to eight-month lows after a short-lived surge at the start of January.
While Japan’s economy is expected to have contracted sharply in the last three months of 2019 following a destructive super typhoon and a sales tax hike that cooled spending, the trajectory for this year now looks less gloomy. A slump in overseas demand may have bottomed and the Abe administration’s stimulus is set to give the economy a shot in the arm.
The fiscal injection looks sufficient to help get growth back on track this year and remove the need for additional action by a central bank already stretched close to the limits of its policy toolkit and facing mounting costs of its easing program. The BOJ now projects the economy to expand 0.9% in the year starting in April, compared with a 0.7% forecast in October.
Abe has also aided the BOJ’s position by playing down the significance of continued feebleness in price growth. While movements in inflation were previously seen as potential triggers for policy action, government pressure on the central bank to achieve its 2% price goal has dissipated considerably. The prime minister didn’t even mention deflation in his inaugural speech at the start of this year’s parliamentary session on Monday.
Abe has likely calculated that calling for higher inflation risks a public backlash after the government forced up prices with the sales tax increase in October.
As the year progresses the focus is likely to shift to when the BOJ will step back from its tilted bias toward easing to a more neutral stance, assuming no events derail the recovery. The change in guidance would be a necessary move toward contemplating an eventual normalization of policy. Most economists surveyed by Bloomberg now expect the bank’s next move to be in the direction of tightening, though the likely horizon for that would be next year.
“The economic and market environment is much less tense for the BOJ now,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance, ahead of Tuesday’s decision. “Unless the yen gains sharply, the BOJ will probably enjoy staying on cruise control for the rest of the year.”
What Bloomberg’s Economist Says
“On balance, the prospect of increased government spending (from a stimulus package and planned record budget for next fiscal year) gives the BOJ some breathing room. The positive developments on the U.S.-China trade war front also help.”
–Yuki Masujima, economist
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(Adds economist comments.)
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