Last Friday the Bank of Japan (BOJ) voted to keep interest rates unchanged and upgraded its economic assessment for the Japanese economy. The BOJ left the overnight call rate unchanged at 0.1% and said that the Japanese economy is starting to recover moderately. The BOJ attributes the improving economic outlook in Japan to stronger global growth and rising Japanese export sales. Last Thursday Japan reported that Q1 GDP grew at a 4.9% annualized rate. Japan’s growth is outpacing the US and EU. Japan’s April trade balance will be released Thursday, May 27th. Japanese exports have been rising for the last four months reported up 43.5% in March. Export sales are expected to post a modest slowing in the April report.
The BOJ also announced a new lending facility aimed at banks that make loans to environmental energy business and research and development. The BOJ hopes that the new lending facility will help boost growth and productivity. The BOJ also said that deflation may end sooner than previously thought. The BOJ raised its median forecast for the core CPI index to 0.1% in 2011 2012 compared to previous forecast of a 0.2% fall. The BOJ minutes for the April policy meeting were released today and the minutes state that the BOJ is monitoring the impact of the BOJ ease in March and that BOJ sees the optimum inflation rate between 0.5 -2% . The BOJ expanded its lending facility from ¥10trln to ¥20trln in March to commercial banks loaning at a rate of 0.1%. The BOJ minutes did not state how the BOJ plans to boost Japan’s inflation rate to achieve this target range. Just stating a target range for Japan’s inflation may not be enough to steer Japan’s inflation rate higher. Deflationary pressures continue in Japan with Japan’s April corporate service prices declining by 0.4%. BOJ Governor Shirakawa said that price stability is a primary mandate for the BOJ but it should not be the sole factor in determining monetary policy. He went on to say “low inflation historically tended to delay monetary tightening, brewed overconfidence in the economy and created bubbles”. Shirakawa’s comments suggest that the BOJ does not plan to focus solely on price stability and the Japanese inflation outlook for determining monetary policy.
On Friday, May 28th Japan will release a number of economic reports including CPI. The reports are expected to confirm a sharp decline in retail sales, household spending, a weak employment growth and deflation. Household spending is expected to fall by 0.6% compared to 4.4% last month, the unemployment rate is expected unchanged at 5% and retail sales are expected to fall by 0.5% compared to a 0.8% rise last month. Consumer prices in Japan have fallen for 13 consecutive months reported at -1.3% in April. Japan’s April CPI is expected to decline at an annual rate of 1.4%. The decline will reflect continued slack in the Japanese domestic economy and lack of pricing power by Japanese retailers. The CPI report is expected to confirm that BOJ policy efforts to boost deflation continue to fail. It is unlikely that BOJ’s announcement of a new lending facility will provide the BOJ with any greater success in combating deflationary pressures. If the April CPI report confirms that deflationary pressures are accelerating and the housing retail sales and employment data suggest that the recovery may be slowing the BOJ will likely come under new pressure from the Japanese government to take additional actions to combat deflation. This could include a call for the BOJ to consider additional quantitative easing measures with the BOJ buying bonds to try to drive down long-term interest rates. The Japanese government may also renew it’s called for the BOJ to set an inflation target.