BoJ maintains annual stimulus at 60-70 trillion yen, eyes higher GDP

The board of Bank of Japan at its monetary policy meeting yesterday unanimously decided to continue money market operations so as to expand the monetary base at an annual pace of ¥60-70 trillion.

BoJ had earlier said it kept intact its intense monetary stimulus programme, launched in April, under which it aimed to double base money via asset purchases to meet its target of lifting inflation to 2 per cent in roughly two years.

The decision comes after the US Federal Reserve maintained its own massive bond-buying programme.

In its semi-annual outlook report, the BoJ kept its forecasts for core consumer inflation in fiscal 2014 and 2015 at 1.3 per cent and 1.9 per cent respectively, excluding the increase in the sales tax, a sign it is on track to meet its goal.

The BoJ also revised its economic growth forecast upwards slightly to around 1.5 per cent for the next fiscal year.

Japan's potential growth rate - under a certain methodology - is estimated to be "around 0.5 per cent" on average during the projection period, and the BoJ expects this to rise gradually toward the end of the projection period.

However, it said, the estimates of the potential growth rate are subject to a considerable margin of error as they rely on the specific methodology employed and could change as more data for the relevant period become available. 

Japan's economy has been recovering moderately. On the demand side, while exports have been picking up at a somewhat slower pace, domestic demand, notably private consumption, has been firm.

Reflecting such domestic and external demand, on the production side, the pace of increase in industrial production has remained moderate while activity in the non-manufacturing sector, including services and construction, has been somewhat strong.

Looking ahead, while domestic demand is likely to maintain firmness as external demand is expected to increase, albeit moderately, a virtuous cycle among production, income, and spending is likely to be maintained.

Therefore, while the economy will be affected by the front-loaded increase and subsequent decline in demand prior to and after the two scheduled consumption tax hikes, it is likely to continue growing at a pace above its potential, as a trend, BoJ said.

The projection is based on the assumption that as the Bank of Japan steadily pursues quantitative and qualitative monetary easing (QQE), financial conditions are likely to become more accommodative, it added.