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Recap of the BoJ Summary of Opinions – April 2017

The Bank of Japan published last Wednesday, its outlook on the summary of opinions presented at the April 26, 27 monetary policy meeting. The report revealed that BoJ policymakers were cautious on the inflation outlook amid uncertainty in wage growth and weak retail sales.

According to the report, some BoJ officials wanted the central bank to maintain its quantitative easing program in an effort to overcome deflation and to push consumer prices to the central bank’s inflation target of 2%.

However, some members also disagreed with this view, noting that the central bank should cut QE purchases while it can without causing too much disturbance in the markets.

BoJ policy makers remain optimistic on inflation

At the April 26 – 27 monetary policy meeting, the Bank of Japan left interest rates unchanged at -0.10% and noted that it remained optimistic of reaching the inflation target of 2% by 2018. The central bank had however lowered the medium term inflation outlook.

A BoJ policy maker was optimistic on inflation noting that the annual inflation rate less fresh food will rise towards the central bank’s 2% target rate at a gradual pace. The policy maker said that the upward price pressures in commodity prices would contribute to an increase in consumer prices.

However, the official said that it would "take some time" for inflation to accelerate.

Similar views were echoed by other policy makers who repeated the official line that despite sluggish growth in consumer prices, inflation could accelerate on the back of a continued expansion in the economy and a widening output gap.

BoJ officials said that there was no reason to change the bank’s outlook for inflation in the longer term and that they will continue to monitor the price developments accordingly.

While a majority of policy makers remained optimistic on inflation, some members expressed their doubts. One official said that it was difficult to expect inflation to rise sharply during the period.

BoJ governor addresses the parliament

The Bank of Japan’s governor Kuroda appeared before the Parliament last week where he remained upbeat on the course of monetary policy. Here are some key points that the BoJ governor spoke about.

On the exchange rate:

On the exchange rate, the BoJ governor told lawmakers about the benefits of a weaker yen for the economy and that he was not worried on the current declines in the exchange rate. "The weak yen has had positive effects on capital investment and employment by increasing profits at export-oriented companies," Kuroda said, although cautioning that a weaker exchange rate puts pressure on household purchasing power while also making imports more expensive.

On the risks of policy tightening:

Kuroda also had some views on a premature exit from the central bank’s massive QQE program. He told Japanese lawmakers that a premature exit from the central bank’s ultra easy monetary policy could push the central bank into the "red." When pressed by lawmakers whether the central bank will post losses, the BoJ Governor said: "Based on that scenario, that is true." The condition being the BoJ hiking the short term deposit rates while reducing the government bonds and holding them to maturity.

On exchange rate and exports:

The Governor also spoke about the exchange rate and exports and countered the view that Japan preferred a weaker exchange rate to boost exports. Kuroda told lawmakers that as far as trade between U.S. and Japan was concerned, the exchange rate doesn’t lead to a sharp increase in the economic growth rate through boosting exports.

Kuroda said this was more applicable to countries such as Germany and South Korea (two other countries that were named by the Trump administration for manipulating the exchange rate to gain a competitive edge in global trade).

The BoJ’s summary of opinions and the comments by the BoJ governor evoked mixed responses as the initial optimism that came off the upgraded economic forecasts during the April meeting are starting to fade on the back of renewed doubts among policy makers.

Up ahead, the quarterly GDP numbers from Japan will be released on Thursday.

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