Central Banks

Bank of Japan raises economic forecasts, while keeping policy steady

Key Points
  • The Bank of Japan stood pat on monetary policy when it announced its meeting outcome on Thursday.
  • The BOJ raised its economic assessment, increasing its GDP growth forecast for the currency fiscal year, but it lowered its core CPI forecast slightly.

The Bank of Japan raised its economic forecasts at its policy meeting outcome on Thursday, but it kept policy steady, as was widely expected.

The BOJ raised its economic assessment. It increased its real gross domestic product (GDP) growth forecast for the 2017-18 fiscal year to 1.6 percent from the 1.5 percent projected in January. But it lowered its core consumer price index (CPI) growth forecast to 1.4 percent from 1.5 percent in the same period.

The yen moved only slightly on the announcement, with the dollar fetching around 111.23 yen before the announcement, compared with 111.16 yen at 11:36 a.m. HK/SIN.

Marcel Thieliant, a senior Japan economist at Capital Economics, said in a Thursday note that despite the BOJ raising some growth forecasts, he didn't follow the consensus view that the yield target might be increased by the end of next year.

"The bank now sees the economy 'expanding' rather than just 'recovering,'" he noted, but added that lowering the inflation forecast indicated the BOJ was still struggling to increase inflation.

"We believe that the bank remains too optimistic about inflation. The main reason is that wage growth remains tepid despite a tight labor market," Thieliant said, expecting monetary policy would remain unchanged for "the foreseeable future."

The central bank has been pursuing a yield-curve control policy, introduced at its late-September meeting.

Bank of Japan (BOJ) governor Haruhiko Kuroda attends a press conference at the BOJ headquarters in Tokyo on April 27, 2017.
Jiji Press | AFP | Getty Images

The BOJ had set its target yield for the benchmark 10-year Japanese government bond at around zero percent, and it has been willing to intervene to keep the benchmark yield in line with its target.

That theoretically means the BOJ can buy fewer bonds as it would only need to time its purchases for when the yield curve moves away from its target. That would help ease concerns that the central bank, which already owns more than 40 percent of all JGBs by value, would run out of bonds to buy as it continued with its planned 80 trillion yen (around $697.87 billion) annual pace of expansion of its monetary base.

The BOJ has taken essentially a "whatever it takes" stance on boosting inflation, saying it would maintain an easy stance until inflation exceeded its target of 2 percent "in a stable manner."

Japan's economy grew 1.2 percent annualized in the October-to-December quarter, according to revised data released last month, but that was still below the 1.6 percent forecast in a Reuters poll.