Bank of Japan stands pat ahead of leadership change

LONDON (ShareCast) - The Bank of Japan (BoJ) kept its monetary policy unchanged in the last meeting under Governor Masaaki Shirakawa, who is expected to be substituted by an advocate of more aggressive policy to beat deflation and boost the economy.

As expected, the key interest rate was kept unchanged at 0-0.1% and the asset purchase programme held at ¥76trn. The nine-member board voted unanimously.

Nonetheless, one policy board member proposed to begin immediately the open-ended asset purchases scheduled to begin in 2014. Another policy board member proposed making the commitment of keeping its policy rate near zero until the 2.0% inflation target is hit. Both measures were voted down eight to one.

Regardless, the BoJ maintained its dovish stance: "The Bank will pursue aggressive monetary easing, aiming to achieve the above-mentioned price stability target [2.0%], through a virtually zero interest rate policy and purchases of financial assets, as long as the Bank judges it appropriate to continue with each policy measure respectively.

"In addition, the Bank will provide support for financial institutions' efforts to strengthen the foundations for economic growth and to increase their lending."

With regards to the ecnomic outlook, the BoJ said that Japan's economy is expected to level off and thereafter "will return to a moderate recovery path mainly against the background that domestic demand remains resilient partly due to the effects of various economic measures and overseas economies gradually emerge from the deceleration phase."

Although the markets have been pricing in more aggressive policy, the consensus was that no change would occur at this meeting. Some analysts expect new stimulus to begin in the April 3rd-4th meeting under the new leadership.

Attention is turning to that next meeting, which would be chaired by Haruhiko Kuroda if his nomination is approved. Kuroda has already pledged to "do everything possible to get out of deflation."

JP