Policy intact, outlook upgraded
When the Trump camp coined the slogan ‘Making America Great Again,’ it is unlikely they had the interests of Japan (EWJ) in mind. However, the new U.S. administration has proved beneficial to Japan thus far, and Japanese policymakers expect it to continue.
In its latest monetary policy meeting on January 31, the Bank of Japan kept its policy tools intact. It will maintain its -0.1% interest rate on certain bank deposits, continue to aim at about 0% yield for the 10-year Japanese Government Bond under the Yield Curve Control regime, and sustain its program of buying government bonds worth 80 trillion yen per year.
Expecting better economic growth
However, the key takeaway of the Bank of Japan’s January 2017 meeting was actually not its policy decision, but the increase in economic growth forecasts.
The central bank expects Japan to grow 1.4% for the year ending March 2017, up from 1% expected earlier. For the fiscal year April 2017 until March 2018, the bank expects an economic growth of 1.5%, up from 1.3% estimated earlier.
Analyzing the upgrade to its economic growth forecasts, the Financial Times noted that “given Japan’s falling population, such a pace is more than a percentage point above the long-run trend — equivalent to growth of more than 3 per cent a year in the US.”
US policies giving Japan hope
One reason for the upgrade in economic growth assessment is the fall in the Japanese yen seen after Donald Trump’s victory. A decline in the domestic currency helps its exports become attractive price-wise in the international market, particularly for an exports-driven economy like Japan (DXJ).
Another aspect that has led to the central bank raising its growth forecasts is the fiscal stimulus and infrastructure spending push expected from the Trump administration.
However, inflation is yet to show signs of a rise towards the targeted 2% level. The Bank of Japan is hopeful that inflation will be in positive territory this year following the rise in energy prices and will thereafter rise towards its target level.