BOJ keeps monetary policy steady amid COVID-19, supply concerns
Written by tokyoclub on September 22, 2021
The Bank of Japan on Wednesday kept its ultraeasy monetary policy intact to help the economy weather curbs to combat COVID-19 and supply chain disruptions in Southeast Asia.
At the end of a two-day policy-setting meeting, the BOJ stuck to its overall assessment of the economy as picking up even in a “severe” situation. But it acknowledged the impact of supply-side constraints on exports and industrial production, key drivers of the world’s third-largest economy.
Photo taken in June 2019 shows the Bank of Japan headquarters in Tokyo. (Kyodo)
The BOJ will closely monitor developments in financial markets recently rattled by concerns about a potential default by major Chinese property developer Evergrande Group, Governor Haruhiko Kuroda told a press conference.
“The Bank of Japan will continue to watch closely any change in market views on the debt issue and its impact on global financial markets,” Kuroda said.
In a widely expected move, the Japanese central bank decided to keep short-term interest rates at minus 0.1 percent while continuing to guide 10-year Japanese government bond yields around zero percent to keep borrowing costs low for companies and households. In addition, it will continue to buy exchange-traded funds as needed, with its annual limit at 12 trillion yen ($110 billion).
The BOJ’s meeting came a week before the ruling Liberal Democratic Party elects its new president, who will almost certainly become Japan’s next prime minister as incumbent Yoshihide Suga’s current term as LDP leader expires at the end of this month.
Four candidates in the LDP race recognize the need to keep crisis-mode support for the pandemic-hit economy with financial markets looking for any hints of change from “Abenomics,” which relies heavily on bold monetary easing and fiscal stimulus.
“Exports and industrial production have continued to increase despite some exports and production having been affected by supply-side constraints,” the BOJ said in a post-meeting statement.
Japan’s economy has “picked up as a trend” and is likely to recover as the impact of COVID-19 wanes and vaccinations progress, though economic activity, mainly in the services sector, will be lower than before the pandemic for the time being, according to the statement.
The Japanese central bank said it will maintain support for companies struggling with the fallout of the pandemic so they can gain access to funding needs.
The spread of the highly contagious Delta variant of the novel coronavirus has forced the Japanese government to place prefectures with relatively high infection numbers under a state of emergency.
The current declaration is due to end on Sept. 30, and the government is considering lifting it partially or entirely, government and ruling party sources said Tuesday.
Casting a pall over the outlook for a recovery led by manufacturers, a global semiconductor shortage, and factory shutdowns in Southeast Asia due to the spread of COVID-19 have made it difficult for Japanese carmakers, including Toyota Motor Corp. and Honda Motor Co., to secure enough parts, leading to sharp production cuts.
Soaring material costs are another source of headache for Japanese companies as they appear reluctant to pass them onto consumers by raising prices, which would squeeze their profits. Recent sharp gains in wholesale prices have yet to translate into higher consumer prices in Japan.
The BOJ stands in sharp contrast with the U.S. Federal Reserve, which is expected to start dialing back asset buying as early as this year. Financial markets are looking to see when the U.S. central bank will begin raising interest rates.
In rallying support, the LDP candidates are placing priority on the coronavirus response, a major concern among the Japanese public and BOJ watchers say the central bank would keep its accommodative policy while its 2 percent inflation target has become all the more elusive.
Vaccination minister Taro Kono, a leading candidate in media polls, has said that attaining the 2 percent inflation target would be “very difficult” under current conditions but added that monetary policy should be left to the central bank. Another contender, Fumio Kishida, a former foreign minister and long considered a fiscal hawk, believes the 2 percent target is a “global standard” and should be maintained.
Former communications minister Sanae Takaichi, who is close to former Prime Minister Shinzo Abe, wants to build on Abenomics.
Years of aggressive easing brought the BOJ no closer to the inflation target and Japan’s core consumer prices excluding volatile fresh food, a gauge of inflation, fell for the 12th straight month in July.
After the policy meeting, the BOJ unveiled disclosure requirements for financial institutions seeking to receive zero-interest funds for their loans and investments to tackle climate change under the central bank’s new program. Information on governance, as well as targets and results for the funds spent, need to be reported.