May 21, 2014, 17:00 JST

BoJ no longer preoccupied with the deflation risk

Summary

BoJ kept its policy unchanged, but the policy statement as well as the press conference by the governor Kuroda dropped enough hints that the BoJ is gradually shifting its policy stance from a strongly-anti-deflation to a more balanced stance. The chance of additional monetary easing is becoming more distant and the bank seems more tolerant for a rise in long term interest rates. 

Bank of Japan kept its policy unchanged on May 21, as expected. However, there was an interesting change in the policy statement suggesting that the BoJ no longer feels that curing deflation is the single most important task for them.

In previous policy statements, the BoJ concluded by stating “…..monetary policy will support the positive movements in economic activity and financial markets, contribute to a rise in inflation expectations, and lead Japan's economy”. In today’s statement, it concluded by stating “Quantitative and qualitative monetary easing (QQE) has been exerting its intended effects, and the Bank will continue with the QQE, aiming to achieve the price stability target of 2 percent.”. Governor Kuroda downplayed the significance of this change in the press conference after the policy meeting, but we think the change carries a message that curing the deflation should no longer be the preoccupation of the BoJ and the bank should have more balanced view on various risks to the economy.

Our judgment from the policy statement and the following press conference is that the BoJ remains optimistic on the outlook of the Japanese economy and do not feel any need for additional easing in the immediate future.     

Important takeaways from the governor’s press conference

-When asked for his outlook on the economy, he repeated his previous stance that he expects the growth rate in April-June quarter to be negative, but the growth will resume after the summer.

-When asked for his take on sluggish stock market and moderately rising yen, he replied that the stock market should reflect corporate earnings he feels that rising stock market trend has not changed. As for yen, he was careful, but he implied that the tapering by the U.S. Fed eventually should weaken yen.

-When asked if the BoJ would intervene if the long term interest rates start to rise dramatically, he replied that a central bank should take measures if the movement in the interest rates is seen to stray away from the fundamental and deemed undesirable.

-Otherwise, there were a few more interesting questions such as the appropriateness of the current accommodative policy when the Japanese economy seems supply-constrained, and what would BoJ do if 2% inflation target is reached with low growth, but the governor kept his answers vague.   

Market implication

As symbolized in the change in the policy statement, the BoJ seems to think that the deflation is no longer the preoccupying risk for the Japanese economy, and the bank is seeing potential risks coming from both upside as well as downside. Such change in the stance would imply less chance of additional easing and the BoJ becoming more tolerant of a rise in long term interest rates. For markets, it would imply higher yen, steeper yield curve and less chance of stock market friendly actions.