October 31, 2016 / 9:05 PM / 3 years ago

BOJ seen holding fire even as inflation goal remains elusive

* BOJ seen keeping yield curve targets steady

* Cut in price forecast eyed in quarterly review

* Board may debate wording on bond buying amount

* Policy decision, f’casts seen due 0330-0530 GMT

* Gov Kuroda to brief media 0630 GMT

By Leika Kihara

TOKYO, Nov 1 (Reuters) - The Bank of Japan is expected to maintain monetary settings and its projection of a moderate economic recovery on Tuesday, even as weak consumption and external headwinds force it to concede that inflation will remain distant from its target for years to come.

With policy on hold, the nine-member board may debate some operational details of its new policy framework adopted in September, such as to what extent the central bank could slow its bond purchases if yields fall below target.

The BOJ switched its policy target to interest rates from the pace of money printing in September, after years of massive asset purchases failed to jolt the economy out of stagnation, raising fresh doubts about the central bank’s ability to engineer a revival amid its diminishing policy arsenal.

BOJ Governor Haruhiko Kuroda also faces a board divided on some key aspects of the new framework, a sign of the daunting challenges he confronts in trying to stoke public optimism on future growth and inflation expectations.

Kuroda is likely to signal in his post-meeting news conference that while the pace of the BOJ’s bond buying could fluctuate in the future, the central bank won’t sharply reduce its bond purchases any time soon.

In a quarterly review of its forecasts, the BOJ is set to cut next fiscal year’s price forecast slightly and admit that inflation won’t hit its ambitious 2 percent target before Kuroda’s term ends in April 2018.

But the central bank is expected to maintain its minus 0.1 percent short-term interest rate target and a pledge to guide 10-year government bond yields around zero percent, after having modified its policy framework in a move seen as switching to a long-term battle against deflation.

“The BOJ will probably cling to its view that inflation will accelerate ahead because it doesn’t want to ease,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“But the downward pressure on inflation from recent yen gains will last for another year and consumption will remain weak, meaning the BOJ will eventually have to ease again.”

Core consumer prices fell for a seventh straight month and household spending slumped in September, a sign weak consumption is discouraging firms from raising prices.


Japan’s economy expanded for the second straight quarter in April-June but many analysts expect growth to remain modest for the rest of this year, with exports and output weak on sluggish global demand. Slow wage growth has also hurt consumption, further undermining the chance of a strong near-term revival in the world’s third-largest economy.

Under a new “yield curve control” (YCC) framework, the BOJ’s main means for monetary easing would be to deepen negative rates and accompany it by a cut in the 10-year yield target if needed.

While not an official target, the BOJ kept a pledge to buy bonds at the current pace so its holdings rise at an annual pace of 80 trillion yen ($764 billion) to avoid markets from prematurely concluding the bank could taper its stimulus programme.

Some BOJ officials say the central bank may eventually remove the 80-trillion-yen reference, as the pace of buying could slow if it can achieve its yield target with fewer amounts.

Kuroda may try to garner a consensus within a framented board though this will not be easy. Advocates of aggressive money printing, such as board member Yutaka Harada, have contradicted Kuroda’s comments that the pace of the BOJ’s bond buying could slow in the future. ($1 = 104.7500 yen) (Editing by Shri Navaratnam)

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