- The Bank of Japan (BOJ) held steady on policy and interest rates and remains cautiously optimistic on growth prospects, despite growing headwinds across Asia.
- Governor Kuroda also gave additional details of the new Climate Response Financing Operations, underlining how Japan’s policy framework is increasingly oriented towards ESG.
- With no prime ministerial candidate proposing a change of direction in monetary policy, a major shift looks unlikely before Kuroda’s term expires in 2023
Tweaking the policy dials at this juncture always looked unlikely, considering recent economic data and the effective political interregnum ahead of the ruling Liberal Democratic Party (LDP)’s 29 September leadership election. The Bank held steady on all its main positions on QQE, Yield Curve Control (YCC) and the 2% inflation target, including the -0.1% short-term interest rate, 0% yield target on 10-year JGB bonds (with no upper purchase limit), and upper purchase limits for exchange-traded funds (ETFs) of JPY 12tn (USD 109bn) and commercial paper and corporate bonds together of JPY 20tn (USD 182bn). It also extended its Covid-19 special financing measures through to March 2022.
The BOJ did cut its assessments for exports and output due to supply chain disruptions in Asia, and noted Delta’s domestic dampening effect on employment, income, and consumption. But overall, it remains cautiously optimistic that Japan’s economy will start to see growth as the pandemic subsides, citing the accelerated vaccine rollout, high external demand (with no anticipated Evergrande spillover), accommodative financial conditions, and the government’s economic measures. The Bank also expects rising energy costs to drive a slight uptick in the core Consumer Price Index (excluding fresh food), which is currently hovering around zero. Yet export-driven growth in the coming quarters seems far from assured, considering such headwinds as the ongoing semiconductor shortage, downward revisions to China’s growth forecasts, rising costs of inputs, congested global shipping, and the slower vaccine rollouts in Southeast Asia. Similarly, the outlook on inflation isn’t clear, as many prefectures will only start a slow journey back to economic normality when state of emergency measures end on 30 September.
The most significant information to emerge from this monetary policy committee meeting concerned the new Climate Response Financing Operations, a green lending facility aimed at helping mitigate the systemic risks posed by climate change. Through to March 2031, interest-free one-year rolling loans will be provided equivalent to firms’ outstanding investments or loans related to climate change reduction in Japan, Double the amount of loans will also be added to the Macro Add-on Balances in current accounts held at the bank. Qualifying institutions must meet certain Task Force on Climate-Related Financial Disclosures (TCFD)-type requirements, and detail targets and performance. The scheme is now open for applications and will disburse biannually, beginning in December.
Similarly, the Financial Services Agency is in the process of establishing standards for green bonds, a new information platform for trading them, and is considering mandating climate risk disclosures. These moves are clearly designed to support the government’s ambitious recent decarbonization agenda, including goals of a 46% net carbon emissions reduction from 2013 levels by 2030 and net zero by 2050. The leading candidates to succeed Prime Minister Yoshihide Suga have all endorsed these targets, and the green turn in Japan’s policy framework is only likely to continue in future.
No monetary policy changes imminent under the next PM
Despite different emphases among the prime ministerial contenders, all appear to be essentially proposing to continue the reflationary Abenomics framework for the foreseeable future. Opinion poll-topping Taro Kono said recently that the BOJ should maintain an accommodative stance during the pandemic recovery, though he thinks the 2% goal will be difficult to achieve in current circumstances. Over a longer horizon Kono may reconsider that approach, having previously spoken about the need for an exit strategy towards a more conventional monetary policy. Fumio Kishida, a sometime fiscal hawk trying to win over the Shinzo Abe wing of the party who has also previously raised the exit strategy issue, is now throwing his weight behind ultraloose money and 2%, though he also promises fiscal consolidation some sunny day.
Sanae Takaichi seeks to prioritize the push for 2% over attaining a primary balance by 2025, and also wants the BOJ to follow the Fed’s dual mandate by adding employment to price stability as a monetary policy goal. Takaichi’s stock has risen so much among LDP members since being endorsed by former PM Abe that some media sources have switched her label from “hardline nationalist” to “staunch conservative,” but third place currently seems her most likely outcome. Last-minute entrant and rank outsider Seiko Noda appears still to be in the process of working out her economic policy platform ahead of next Wednesday’s vote. Going forward, while some quiet tapering is possible, a major monetary policy shift looks unlikely under the next PM during the remainder of Kuroda’s term through to 2023, and certainly not before the economy posts several quarters of growth.