Bank of Japan seen standing pat amid growing focus on 10-year yield range

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Published: October 29, 2018 7:59:11 AM

All 46 analysts surveyed by Bloomberg expect no change in monetary policy at the end of a two-day meeting on October 31.

Bank of Japan, policy statement, BOJ policy statement, BOJ quarterly outlook, economy newsSix months after the levy was increased in April 2014, the BOJ expanded its stimulus partly because of weakness in domestic consumption resulting from the tax increase. (Reuters)

The Bank of Japan will maintain its policy settings at its meeting this week, according to economists surveyed by Bloomberg, amid a growing view that the BOJ will eventually use greater flexibility in yield movements as a tightening measure.

All 46 analysts surveyed by Bloomberg expect no change in monetary policy at the end of a two-day meeting on Oct. 31. Some 63 percent think inflation forecasts will be “largely unchanged” in a quarterly outlook report due out with the policy statement, while 33 percent predict a minor downgrade.

The survey also showed that more than 90 percent of the analysts don’t expect the central bank to take extra action to support the economy when the sales tax is increased next year. Most of them expect the central bank to have tightened policy within a year of the tax rate going up in October.

Most economists expect the bank’s first tightening move to be a raising of the 10-year yield rate, but the survey also showed that a growing number of analysts expect it to further widen the movement range of its long-term yield target as a tightening step by the end of 2020.

Some officials at the central bank already see the permissible movement in the yield as wider than perceived by market players, according to people familiar with the matter. The BOJ aims to keep the yield on 10-year Japanese government debt around zero percent as it tries to stimulate price growth in the economy by controlling both short and long-term interest rates. In July it allowed a wider range around zero as it looked to reduce the side effects of its easing program, which was hurting markets and financial companies.

About half of the economists also see the BOJ raising its negative rate by the end of 2020, compared with around a third in the previous survey. The central bank uses the rate on some commercial bank balances held at the BOJ to control short-term rates. The findings suggest that after digesting the bank’s policy tweaks in July, economists are increasingly seeing the end of 2020 as a line in the sand for tightening action.

The view that the bank won’t take extra action to support the economy when the sales tax is increased tallies with a general view among economists and the BOJ that the economic impact of the tax increase this time round will be softer in comparison with 2014. Prime Minister Shinzo Abe confirmed he would press ahead with his plan to raise the sales tax to 10 percent from 8 percent earlier this month.

Six months after the levy was increased in April 2014, the BOJ expanded its stimulus partly because of weakness in domestic consumption resulting from the tax increase. This time the hike is smaller, food items are excluded from the increase and Abe is working in overdrive to deliver counter measures that will prop up demand.

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