Japan to Continue QE Measures

Bank of Japan Gov. Haruhiko Kuroda has moved to quell recent market speculation that the central bank will tighten the monetary taps, saying it will continue its monetary easing measures in light of weak inflation.

Kuroda's remarks came as the BoJ concluded its two-day monetary policy meeting on Thursday, during which it decided to maintain its negative interest rate policy, as well as keeping the yield on 10-year Japanese government bonds near zero, despite Japan's gross domestic product registering a seventh consecutive quarter of growth in July-September period—the first time in 29 years that an expansion has run so long, Nikkei reported.

"We won't decide to raise our interest rates just because the economy is in good shape," Kuroda said at a news conference in Tokyo the same day. "What is important for us is to continue our monetary easing with persistence, creating an environment where our 2% inflation target can be achieved and maintained in a stable manner."

The decision to maintain the status quo capped off a year of inaction on the policy front for the central bank, making 2017 the first year since Kuroda became governor in 2013 that the BoJ has made no new policy moves.

Speculation that the bank would tinker with monetary policy rose when Kuroda mentioned the concept of the "reversal interest rate" in a speech he gave in Zurich in November.

The "reversal interest rate" refers to the process whereby excessively low interest rates hurt the banking sector, making it harder for banks to act as financial intermediaries. In such a case, the effects of monetary easing could reverse and become contractionary.

Reduction in New Debt

Japanese Economy Minister Toshimitsu Motegi said on Friday the national budget for next fiscal year showed the government was able to reduce new debt issuance by a big margin because of its pro-growth economic policies.

Motegi, speaking to reporters, said the government still aimed to achieve a primary budget surplus and would start debate next year on when it would be possible to achieve this target.

Motegi spoke after the cabinet approved a record budget for next fiscal year. The government will sell new bonds to finance part of next year’s budget, but the level of new bond sales will be the lowest in nine years.

Trade Deals to Boost GDP

Japan's recently sealed free trade pacts with 10 Pacific Rim countries and with the European Union will increase real gross domestic product by an estimated 13 trillion yen ($114.6 billion) and create 752,000 jobs by boosting exports and investment, the Japanese government said Thursday, Kyodo reported.

The estimated combined effects of the Trans-Pacific Partnership and the trade agreement with the European Union, both expected to be implemented as early as 2019, would be equivalent to 2.5% of fiscal 2016 real GDP.

But the government estimates production in the agriculture, forestry and fishery sector will fall by up to 260 billion yen in fierce price competition with low-cost imports.

The government led by Prime Minister Shinzo Abe aims to introduce steps to strengthen the heavily protected agricultural sector to maintain domestic farmers' income and production levels.

But observers are skeptical about the effects of such government efforts as the trade deals could have a bigger impact on the farm sector.

CPI Seen Steady

Japan’s consumer prices were expected to rise fractionally for an 11th straight month in November, a Reuters poll found on Friday, highlighting the reticence of consumer inflation despite the solid economy.

The nationwide core consumer price index, which includes oil products but excludes volatile fresh food prices, likely rose 0.8% in November from a year ago, unchanged from October’s reading, the poll of 19 economists found.

The rate of increase in utility costs slowed down, but the cost of oil products such as gasoline supported core consumer prices, analysts said.

Core consumer prices in Tokyo, available a month before the nationwide data, were projected to be up 0.7% in December from a year earlier versus a 0.6% annual increase in November.

“The contribution from energy prices to core CPI will likely stay steady in this fiscal year but it will peak in fiscal 2018,” Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities, said in the survey.