Japan’s central bank has changed its view of the world economy, saying a slowdown in global GDP growth could affect factory activity and foreign trade, even though for now the Japanese economy is poised to maintain its moderate pace of expansion.
Kristian Rouz — The Bank of Japan (BOJ) says the global economy is showing signs of a slowdown, which could weigh on both imports and exports across the advanced economies, including Japan. In light of its most recent assessments, the BOJ has kept its unconventional monetary policies unchanged in order to support GDP growth at home.
During its policy meeting on Friday, Japan’s central bank kept its negative interest rates regime (NIRP) steady, despite a recent batch of encouraging data from the Japanese exporters and manufacturing sector. BOJ officials said elevated overseas risks could weigh on the pace of GDP expansion in export-reliant Japan in the months to come.
BOJ Governor Haruhiko Kuroda ruled out additional stimulus, meaning interest rates won’t go deeper into the negative territory. Kuroda said higher interest rates are unlikely as well, highlighting the BOJ’s main goal of reaching the 2-percent inflation target.
“I don’t see the need to change the target, or believe that doing so would be desirable”, Kuroda said after the policy meeting on Friday.
The BOJ assessed the pace of GDP expansion in Japan as ‘moderate’, and said the nation’s exports and imports have taken a hit from the slowing overseas demand and disruptions in international trade. During its previous policy meeting in January, the BOJ didn’t mention international risks to the Japanese economy in its closing statement.
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“Exports have shown some weaknesses recently”, the BOJ said. The central bank has taken a murkier stance on its assessment of the state of affairs in international trade, as back in January policymakers expected the volumes of exports and imports to increase as a trend this year.
However, the ongoing trade dispute between China and the US, and delays in striking a bilateral trade deal have affected Japan’s foreign trade as well — as both Beijing and Washington are among Tokyo’s biggest trading partners.
In January, Japan’s exports dropped the most in two years, as shipments to China fell dramatically that month. Japan’s industrial output also dropped in January, and although both exports and factory production have shown signs of a rebound since, China-related concerns linger in the Japanese corporate sector.
“The sharp deterioration in exports and industrial production should be a serious source of concern for the BOJ. I think the BOJ is doing some thought experiments about what they can do”, Masayuki Kichikawa of Sumitomo Mitsui Asset Management said.
For his part, Kuroda dismissed the concerns, saying the Japanese economy is on the right track, albeit it might take longer for it to hit the BOJ’s price growth target. Inflation is a crucial macroeconomic indicator in the Japanese economy in particular, due to its reliance on exports and domestic consumption.
“It is true Japan’s exports and output are being affected by slowing overseas growth”, Kuroda stressed. “On the other hand, domestic demand continues to grow. As such, we maintain our baseline view that the economy is expanding moderately”.
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However, some economists say years of unconventional monetary policies — ultra-low borrowing costs, in particular — have impaired the profitability of commercial banks and other financial institutions, while the BOJ’s massive bond-buying programme was not enough to support business activity.
Japanese Finance Minister Taro Aso said the BOJ could potentially abandon its 2-per cent inflation target, and focus on normalising monetary conditions in the country. Aso suggested the BOJ’s elongated stimulus could hurt the economy.
“No one in the public would be angry even if the inflation target isn’t achieved”, Aso said.
Additionally, the Finance Minister has previously expressed concern the BOJ might not have sufficient firepower to tackle the next recession if it maintains its ultra-accommodative policies for very long.
But Kuroda insists the central bank’s inflation target is the main priority. The BOJ governor believes ending the two decades of near-zero inflation was one of Japan’s key achievements this decade, which could ensure a sustainable pace of economic expansion down the road.
“Inflation is affected by oil price moves and various other factors. We also need to understand it would take some time for inflation to pick up in Japan after a long period of low growth and deflation”, Kuroda said.
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The Japanese economy is expected to continue its moderate expansion throughout this year, with most analysts saying the outcome of the China-US and US-Japanese trade talks will significantly affect the pace of GDP growth in the island nation.
For its part, the BOJ is likely to change its policies only if Japan is facing a threat of an imminent recession — which is unlikely until at least mid-2020.