BOJ Preview: New excuses to kick the inflation can down the road

• The BOJ is set to keep interest rates unchanged in the first decision of 2019.
• The global slowdown provides an excuse to push back the inflation targets.
• The decision will not change the yen's safe-haven status anytime soon.

The Bank of Japan makes its first rate decision for the year on Wednesday, January 23rd, late in the Asian session. The BOJ is projected to leave all policy measures unchanged. 

The Tokyo-based institution has not materially altered its policy since September 2016. Back then, they pledged to keep 10-year yields around 0%, a stimulative policy that joined the negative interest rate of -0.10%. The BOJ continues buying bonds in its Qualitative and Quantitative Easing (QQE) program which is nearing its sixth anniversary.

The BOJ is aiming at 2% core inflation, but the most recent figures from the Tokyo area showed that 2018 ended with a core inflation level of only 0.9%. Governor Haruhiko Kuroda and his colleagues have repeatedly pushed back the timing of reaching the elusive 2% goal. Headline national inflation stood at only 0.7% in 2018. 

Back in 2018, Kuroda hinted that they would perhaps begin withdrawing stimulus in the Fiscal Year 2019 (which begins in April 2019) if inflation gets closer to the target. He did not repeat those words and prices have not gone anywhere fast either. 

Same forecast downgrade, new reasons

So, the only notable change due in the first decision for 2019 is a downgrade of forecasts. The projection for 2019 is set to be trimmed from 1.4% to 1% and also the 2020 forecast is set for a reduction.

This time, the BOJ has new reasons to lower its outlook. The global economy is slowing down. China reported the weakest growth level in 28 years. The International Monetary Fund (IMF) lowered its global growth forecast to 3.5% for 2019. The euro-zone economies are showing growing signs of no-growth. The US is only the economy pushing forward, but it cannot do so on its own. 

Another reason for the downgrade is falling oil prices, a development that is related to global growth but also to oversupply. While it directly impacts only headline inflation, the drop in energy prices propagates into the value of other goods.

These issues are cyclical, not structural. The long-term issue is an aging population and that can be resolved by allowing more immigrants in as well as other measures which are not in the realm of the central bank.

Safe-haven yen for the foreseeable future

The Japanee yen's status as a safe-haven currency is solid and unlikely to change. The long-term low-interest rates from the pioneers of QE makes the yen a funding currency for riskier assets. Once risk is off, money is repatriated to where it was lent from the Land of the Rising Sun. 

The BOJ's January 2019 decision is unlikely to change this status, nor will the next decisions in the foreseeable future. Ongoing loose monetary policy is set to keep the currency depressed.

Only a radical change such as hinting of an arbitrary end date could boost the currency, but this is highly unlikely. 

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