The Bank of Japan has launched an overall review of its monetary policy for the first time since 2016 after the Covid-19 shock crushed hopes of achieving its 2 per cent inflation target.
Expected to report in March 2021, the review will consider the potential for “further effective and sustainable monetary easing”, beyond the large-scale asset purchases and negative interest rates used since 2013 and 2016, respectively.
The decision to launch a review highlights the depth of the central bank’s concern over this year’s slide back towards deflation and its inability to achieve its mandated price stability goals.
The BoJ did not signal whether it hoped to ease policy further or simply sustain its current trajectory for the long-term. It said there would be no change to “yield curve control”, under which it purchases government bonds as needed to keep 10-year yields around zero per cent.
“Given that economic activity and prices are projected to remain under downward pressure for a prolonged period due to the impact of Covid-19, the Bank will conduct an assessment . . . with a view to supporting the economy and thereby achieving the price stability target of 2 per cent,” the central bank said.
The launch of the review came as the BoJ said it would extend its special coronavirus loan programmes by another six months to September 2021 and adjust the terms to make them more flexible.
Its programme to buy an additional ¥15tn ($145bn) in corporate bonds and commercial paper, which was split 50:50 between the two asset classes, will now be allocated flexibly according to market conditions.
The BoJ will also extend its offer of cheap loans to help banks finance small and midsized companies through the pandemic, removing an upper limit of ¥100bn per institution to encourage take-up of the scheme.
Overnight, interest rates stayed on hold at negative 0.1 per cent. The BoJ’s targets for purchases of real estate and equity funds were also unchanged.
The central bank’s policy meeting came the same day that new inflation data for November showed the headline consumer price index was down by 0.9 per cent compared with a year ago.
Stripping out volatile fresh food and energy prices, the index was down by 0.3 per cent compared with a year ago, and unchanged from the previous month on a seasonally-adjusted basis.
Under governor Haruhiko Kuroda, the BoJ has made a determined effort to revive inflation, purchasing government bonds worth more than 100 per cent of gross domestic product and cutting interest rates below zero.
But while Japan has recorded an improved macroeconomic performance, it has struggled to change public expectations of stagnant prices, no matter how great the monetary stimulus.
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