The Bank of Japan (BoJ) faced an important credibility test last week. On Friday they released their semi-annual outlook report on the econony in which they had no option but to lower both their growth and inflation forecasts. But in announcing new easing measures they were able to leave their growth forecasts at the optimistic end of market expectations and retain some hope their 2% inflation target would be met.
In their previous forecasts the BoJ was
projecting annual growth of 1.0% in fiscal year (FY) 2014. That had become increasingly unrealistic as
the economy was hit harder by the consumption tax increase in April. Market consensus growth for that period is
now around 0.2% with our forecast at 0.0%.
With lower growth and weaker commodity (i.e. oil) prices their inflation
forecasts had also taken on an aura of make-believe about them.
In announcing new easing measures the BoJ has
been able to keep their growth forecasts at the optimistic end of expectations
by dropping it to 0.5%. That’s the BoJ’s
assumed rate of trend growth. Lowering
their forecast below trend would have made forecasting rising inflation an even
more challenging communications exercise.
Their inflation forecasts are only slightly
reduced. The Bank is now expecting annual
inflation (excluding consumption tax increases) of 1.7% in FY 2015 (down from
1.9%) and 2.1% in FY2016 (unchanged).
Furthermore the timeframe for achieving their 2.0% target is now
As for the easing itself – it was a mix of
both qualitative and quantitative. The
key feature was the increased pace of expansion of the monetary base by ¥10-20
trillion to ¥80 trillion per annum. It
is probably no coincidence this was announced the same day the Government
Pension Investment Fund announced a new target asset incorporating a reduced
allocation to domestic bonds and higher allocations to domestic and global
equities. In addition to the expanded
purchases of JGBs, the BoJ also announced increased purchases of both ETFs and
Will this work? You know what I’m going to say. Without a commitment to considerable
productivity enhancing structural reform, the growth and inflation outlook in
Japan is likely to remain very challenging.
At least I’m consistent!!