Chances of policy easing diminishing - Capital Economics
Japan Economics

Chances of policy easing diminishing

Bank of Japan Watch
Written by Marcel Thieliant

The Bank of Japan will almost certainly leave policy settings unchanged when its forthcoming meeting concludes on 21st January as recent data have mostly been reassuring. And while we expect the labour market to loosen before long, the Bank is unlikely to respond with additional easing.

  • Consumption hasn’t fallen too much after tax hike and labour market remains tight
  • We still expect GDP growth to fall short of expectations this year
  • But lingering capacity shortages will probably convince Bank to remain on hold

The Bank of Japan will almost certainly leave policy settings unchanged when its forthcoming meeting concludes on 21st January as recent data have mostly been reassuring. And while we expect the labour market to loosen before long, the Bank is unlikely to respond with additional easing.

Recent data broadly encouraging

On balance, the data released since the Bank’s December meeting have been encouraging. Admittedly, industrial production fell by another 0.9% m/m in November following the 4.5% plunge in October. That means that industrial output in Q4 probably fell the most in any quarter since the Great East Japan Earthquake.

However, firms’ forecasts point to a modest rebound in production over the next couple of months. And while the global manufacturing PMI dipped in December, it remains above the lows reached in the middle of last year. That’s consistent with our view that global GDP growth will bottom out this quarter.

What’s more, the Bank’s view that October’s sales tax hike will be less damaging than previous ones seems to have been vindicated. The best guide to private consumption in the national accounts fell by a rather small 2.6% m/m in October and the Bank’s own consumption activity index rebounded 2.8% m/m in November. We now estimate that consumption fell by a smaller 1.0% q/q in Q4 instead of our previous estimate of a 1.8% q/q plunge.

Another reason for the Bank to turn more optimistic is the fiscal stimulus package announced by the government in December. Our own view is that the measures won’t provide a major boost to economic activity. But according to press reports, Board members´ median GDP growth forecast for the fiscal year that starts in June may be revised up from 0.7% in October to 1.0% in the upcoming “Outlook for Economic Activity and Prices” in response to the announcement of the fiscal package.

Meanwhile, capacity shortages remain pronounced. The Bank’s estimate of the output gap showed that output exceeded its sustainable level by 1.0% on the eve of the tax hike, unchanged from Q2. (See Chart 1.) While the slump in manufacturing output means that capacity utilisation in the sector declined in Q4, the latest Tankan showed that capacity utilisation in non-manufacturing rose in Q4 even as consumption weakened after the tax hike. And the labour market remains very tight as the unemployment rate dropped back to its cycle-low of 2.2% in November. With the employment rate rising to a fresh high in Q4, labour utilisation will have remained high.

Chart 1: Output Gap (% of GDP)

Source: Bank of Japan

With capacity shortages still pronounced, inflation has remained resilient, at least in Japanese terms. The Bank’s preferred measure of underlying inflation, which strips out fresh food and energy, edged up to 0.6% allowing for the impact of the tax hike. (See Chart 2.) That’s higher than it has been for most of the last three years and will allow the Bank to argue that momentum towards reaching its 2% inflation target has been maintained. As such, the Bank will almost certainly leave policy settings unchanged at the meeting that ends on Tuesday.

Chart 2: Inflation Excluding Fresh Food & Energy (Adjusted for Tax Changes & Childcare Subsidies, %)

Source: Bureau of Statistics

Capacity shortages to remain elevated

Looking further ahead, there’s still a risk that the Bank will have to loosen policy at some point. After all, we think that GDP will decline by 0.1% in the financial year that starts in April rather than expand by 0.7% as anticipated by the Bank. There are two key reasons why we are less optimistic. First, we think that investment will fall by 1.0% in 2020. Firms’ capital spending plans have weakened and investment indicators have taken a turn for the worse. (See Chart 3.)

Chart 3: Investment

Source: Refintiv

Second, while we expect global GDP growth to bottom out this quarter, we expect it to remain soft throughout the year. Our global GDP growth forecast for this year is just 2.7%. That’s well below the IMF’s forecast of 3.4%, which the Bank seems to be using as the reference point for its own projections.

However, the Bank has signalled that it would not loosen policy in response to a temporary slowdown in demand as long as capacity shortages remained pronounced. To be sure, there are signs that the labour market won’t remain as tight as it is now for much longer. Surveys point to a slowdown in employment growth while the recent pick-up in the job-to-applicant ratio suggests that the unemployment rate will rise before long. (See Chart 4.) We expect the unemployment to climb to 2.7% by the end of the year.

But we aren’t convinced that this will be enough for the Bank’s output gap measure to turn negative. After all, we expect the participation rate of women and the elderly to rise further this year which means that the employment rate should edge up. And it would probably take a more severe slump in demand for the pronounced capacity shortages in non-manufacturing to disappear. The upshot is that we reiterate our long-held forecast that the Bank will keep policy rates unchanged for the foreseeable future.

Chart 4: Job-to-Applicant Ratio & Unemployment Rate

Source: Refintiv

Board reshuffle may strengthen case for inaction

The terms of two Board members will come to an end this year, with Yutaka Harada leaving on 25th March and Yukitoshi Funo’s term exiting on 30th June. Mr Funo has kept a low profile and largely stuck to the Board’s official line. By contrast, Mr Harada has been a vocal advocate of aggressive easing. As early as March 2019, he argued that the Bank must ease without delay if the Bank risked missing its inflation target. And he has repeatedly dismissed the argument that the Bank’s aggressive easing has contributed to the decline in banks’ profitability. As such, Mr Harada’s replacement may strengthen the camp of those who are more worried about the health of the banks and therefore less likely to cut interest rates any further.

Table 2: Bank of Japan Background Information

Policy Interest Rate Announcements

There are eight scheduled policy meetings per year, or two per quarter. Once a quarter and shortly after the corresponding policy meeting, the Bank releases its “Outlook for Economic Activity and Prices“.

Release of Minutes

Yes, minutes are published about a week after the next meeting. The Bank also publishes a “Summary of Opinions” of Board members a week after each policy meeting.

Disclosure of Voting

Yes, at time of announcement

Inflation Target

At the January 2013 meeting the Board set a “price stability target” of 2% for the year-on-year rate of change in the consumer price index (CPI), to be achieved “at the earliest possible time”. At the first April meeting of 2013, this was clarified by the addition of the phrase “with a time horizon of around two years”. However, the Bank no longer provides a timeframe for reaching the 2% target.

Policy Guidance

Press conferences at the conclusion of each regular meeting. A summary of opinions for each meeting is published one to two weeks later. Minutes for each meeting are published following the next meeting. Growth and inflation forecasts as well as risk assessments published in quarterly “Outlook for Economic Activity and Prices”.

Monetary Policy Settings

The Bank’s policy rate is the interest rate on freshly-created reserve balances, which is a negative 0.1% at the moment. The Bank has replaced its target for the annual expansion of the monetary base with a target for ten-year Japanese government bond yields. The current target is 0%. The Board has reiterated that it will continue expanding its holdings of government bonds by ¥80 trillion per annum. In reality though, the expansion has slowed sharply.

Membership of Policy Board

Monetary policy decisions are made by a majority vote of the nine members of the Policy Board: the Governor, two Deputy Governors, and six other members.


Mr. Haruhiko Kuroda Term of office expires 8th April 2023

Deputy Governors

Mr. Masayoshi Amamiya (formerly a senior BoJ official) 19th March 2023

Mr. Masazumi Wakatabe (formerly an academic) 19th March 2023

The other six members of the Policy Board.

Mr. Yutaka Harada (previously an academic) Term expires 25th March 2020 Mr. Yukitoshi Funo (previously at Toyota Motor Corporation) 30th Jun 2020 Mr. Makoto Sakurai (previously an academic) 31st March 2021 Ms. Takako Masai (previously at Shinsei Bank) 29th June 2021 Mr. Hitoshi Suzuki (previously at The Bank of Tokyo-Mitsubishi) 23rd July 2022 Mr. Goushi Kataoka (previously at a private research institute) 23rd July 2022

Scheduled Meetings


Outcome / Our Forecast

* Publication of quarterly “Outlook for Economic Activity and Prices”

14 – 15 Mar 19

No significant policy changes

24 – 25 Apr 19*

Relaxation of collateral & lending conditions

19 – 20 Jun 19

No significant policy changes

29 – 30 Jul 19*

No significant policy changes

18 – 19 Sep 19

No significant policy changes

30 – 31 Oct 19*

No significant policy changes

18 – 19 Dec 19

No significant policy changes

20 – 21 Jan 20*

No significant policy changes

18 – 19 Mar 20

No significant policy changes

27 – 28 Apr 20*

No significant policy changes

15 – 16 Jun 20

No significant policy changes

21 – 22 Jul 20*

No significant policy changes

16 – 17 Sep 20

No significant policy changes

28 – 29 Oct 20*

No significant policy changes

17 – 18 Dec 20

No significant policy changes

Sources: Bank of Japan, Capital Economics

Marcel Thieliant, Senior Japan Economist, +65 6595 1514,