BoJ alters forward guidance and cuts economic projections

Summary:

• Bank of Japan decided to keep monetary policy settings unchanged during its October meeting, hours after the Fed cut rates for the third time in a row
• BoJ slashed economic projections and still does not see a possibility to achieve the price objective over the projection horizon
• Kuroda underlines BoJ has room to ease if necessary

Several hours after the Federal Reserve delivered the third rate cut in a row and after Powell communicated a pause in this cycle, the Bank of Japan chose to leave monetary policy settings unchanged, matching market observers’ expectations. Nevertheless, we were offered two important points of note. The first one is a shift in forward guidance and now the BoJ “expects short- and long-term interest rates to remain at current or lower levels as long as it is necessary to pay attention to the possibility of losing price momentum.” In its previous statement the Asian central bank signalled rates would stay at current levels at least around spring 2020. This change is to suggest the BoJ has still a lot of measures at hand, even if it does not have them. The second point is another cut of economic projections (the table below), a move widely expected given the Bank’s inability to reach the inflation target. As a consequence, the BoJ still does not expect that its price objective is attainable over the projection horizon. 

BoJ Governor Haruhiko Kuroda underlined during his press conference that the central bank is not limited to interest rates and has various policy options at hand. He also said that while overseas risks are increasing, they are expected to have a limited effect on Japanese domestic demand. In terms of interest rates, Kuroda stressed they will remain low well beyond spring 2020. To sum up, Japanese monetary policy is unlikely to be changed toward more hawkish in the foreseeable future, if anything, some measures intended to make it yet more accommodative could be on the cards. Thus, the Japanese yen and other JPY-denominated assets should still be more driven by external factors and to a much lesser extent by BoJ’s policy per se.

The BoJ slashed economic forecasts again in October. Source: Bloomberg