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Chief economist update: BOJ has no plans to ease easing

The Bank of Japan (BOJ) kept monetary policy settings at its March meeting - short-term key interest rate at minus 0.1% and the target for the 10-year Japanese government bond yield at around 0%.

It also pledged that it "will continue with Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control, aiming to achieve the price stability target of 2%, as long as it is necessary for maintaining that target in a stable manner. It will continue expanding the monetary base until the year-on-year rate of increase in the observed consumer price index (CPI, all items less fresh food) exceeds 2% and stays above the target in a stable manner".

This was as expected and in-line with unchanged policy decisions by its peers - the Federal Reserve, the European Central Bank and the Bank of England - in the same month. Besides, the BOJ was waxing optimistic over the outlook for the Japanese economy.

"Japan's economy has picked up as a trend, although it has remained in a severe situation due to the impact of the novel coronavirus (COVID-19) at home and abroad," it said.

"Japan's economy, with the impact of COVID-19 waning gradually, is likely to follow an improving trend, supported by a recovery in external demand, accommodative financial conditions, and the government's economic measures."

The Japanese central bank sees inflation remaining negative in the near-term but expects it "to turn positive and then increase gradually, since downward pressure on prices is projected to wane gradually along with economic improvement and the effects of such factors as the decline in crude oil prices are likely to dissipate".

Fair enough. But when? The BOJ's 'Summary of Opinions' at the same meeting in March infers that it won't be soon; "The analysis of the policy effects made in the assessment show that the current monetary easing should be continued for a long time" for as the BOJ, itself, "risks are skewed to the downside".

The latest au Jibun Bank Japan PMI survey shows that overall private sector activity - as measured by the composite PMI - remains in contraction (for the 14th straight month) and at 48.3, the March preliminary estimate improved only marginally from February's final reading of 48.2.

The manufacturing sector expanded for a second month to a flash reading of 52.0 in March from 51.4 in the previous month but the services PMI remained in contraction for the 14th consecutive month, hit by Japan's third wave and the subsequent coronavirus restrictions - increasing only marginally to a preliminary reading of 46.5 in March from February's final reading of 46.3.

While the Japanese economy is expected to expand this year, it would expand slower than its peers.

The OECD's March 2021 "Interim Outlook Forecasts" has Japan's GDP growing by 2.7% this year. This compares with 6.5% for the US; 3.9% for the Eurozone; and 5.1% for the UK.

Read our full COVID-19 news coverage and analysis here.