On June 14th, the Bank of Japan’s second consecutive meeting kept the policy interest rate at 0-0.1%, in line with market expectations. The policy statement also showed that the bank will reduce the scale of its government bond purchases and will clarify the bond purchase plan at the next meeting.

Full text of the interest rate resolution

At today's monetary policy meeting, the Policy Board of the Bank of Japan unanimously decided to set the following guideline for money market operations for the inter-meeting period:

The Bank of Japan will encourage the unsecured overnight call rate to remain at around 0 to 0.1%.

Regarding the purchase of Japanese government bonds, commercial paper, and corporate bonds during the meeting period, the Bank of Japan will follow the decision made at the March 2024 monetary policy meeting. The Bank of Japan, with a majority vote of 8 to 1, decided to reduce the amount of government bonds it purchases to ensure the formation of long-term interest rates in the financial market is more free. The Bank of Japan will collect the opinions of market participants and decide on a detailed plan to reduce future purchases in the next monetary policy meeting in the next one to two years.

The Japanese economy is moderately recovering but some regions still show signs of fatigue. The overall overseas economy is growing moderately, with exports basically flat. Industrial production is generally stable, but due to some automakers' stoppages and suspensions, industrial production has continued to decline recently. Corporate profits have improved, and fixed investment by companies is showing a moderate growth trend. Employment and income situations are moderately improving. Private consumption is strong, but inflationary pressures persist and automobile sales continue to be affected by some automakers' stoppages and suspensions. Housing investment is relatively weak. Public investment is basically stable. The financial environment is relaxed. In terms of prices, the year-on-year increase in the consumer price index (CPI, all items less fresh food) has been between 2.0% and 2.5% recently, and service prices continue to rise moderately, reflecting factors such as wage increases. Although the cost increase caused by the rise in import prices in the past has weakened the pass-through effect on consumer prices, inflation expectations are still rising moderately.

With the overseas economy continuing to grow moderately, the relaxed financial environment, and the gradually increasing virtuous cycle from income to expenditure, the Japanese economy is expected to continue to grow at a rate higher than its potential growth rate. Although the pass-through effect of the cost increase caused by the rise in import prices on consumer prices is expected to weaken, the year-on-year increase in the CPI (all items less fresh food) will rise by 2025 fiscal year due to factors such as the weakening of the effect of government economic measures to suppress CPI inflation. On the other hand, it is expected that the output gap will improve, and medium- to long-term inflation expectations will rise, and the virtuous cycle between wages and prices will continue to strengthen, so the basic CPI inflation is expected to gradually rise. In the second half of the outlook report for the fiscal year 2024 April, it is likely to be at a level that is basically consistent with the price stability target.

Regarding the risk of future prospects, there is still a high degree of uncertainty in Japanese economic activity and prices, including the development of overseas economic activity and prices, the development of commodity prices, and wage and pricing behavior of domestic companies. In this situation, it is necessary to fully monitor the development of financial and foreign exchange markets and their impact on Japanese economic activity and prices.

[Vote in favor of the motion: UEDA Kazuo, HIMINO Ryozo, UCHIDA Shinichi, ADACHI Seji, NOGUCHI Asahi, NAKAGAWA Junko, TAKATA Hajime, and TAMURA Naoki. Vote against the motion: NAKAMURA Toyoaki, although in favor of reducing the amount of government bonds purchased by the Bank of Japan, he holds a different opinion and believes that the Bank of Japan should reassess the development of economic activity and prices in the outlook report to be released in July 2024 before deciding to reduce the amount of purchases.]

Editor/Somer