Inaction may at first glance seem more timid than pulling out the monetary bazooka-but it took nerve for Haruhiko Kuroda to hold fire at the Bank of Japan's monetary-policy meeting on October 30th.
The central bank's policy board, which Mr Kuroda effectively controls, voted 8-1 to maintain the existing programme of quantitative easing (QE, or printing money to buy bonds) at its current level of 80 trillion yen ($660 billion) a year. Given that Japan is officially back in mild deflation for the first time since 2013, when the BoJ began QE, it was a bold decision not to act. The BoJ's mandate, after all, is to produce sustained inflation of 2%.
But Mr Kuroda kept his faith in gradually recovering growth, and in a range of measures which, he believes, suggest robust underlying price rises. In July the central bank began publishing a new index of inflation, known as "new core CPI", which strips out both the price of energy and of fresh food. It shows prices rising at a healthy pace. In August the new gauge rose by 1.1%, and in September by 1.2% (compared to falls in core CPI of -0.1% for both months).
The BoJ duly highlighted the new index in its updated outlook for the economy and prices today. It slashed its forecast for CPI inflation (including energy) for fiscal 2015 from 0.7% to 0.1%, tweaked its prediction for fiscal 2016 and left unchanged its projection for fiscal 2017, acknowledging the greater-than-expected impact of falling oil. Mr Kuroda also postponed the bank's deadline for achieving inflation of 2% by a further six months, until the second half of fiscal 2016.
Financial markets were dismayed by the bank's inaction, which wrong-footed many economists who had bet that Mr Kuroda would have no option but to step up the pace of easing, either by buying Japanese government bonds more quickly or by expanding its purchases of shares via exchange-traded funds. But it will have helped Mr Kuroda that Japan is no longer the only developed country locked in a tryst with mild deflation; oil-price falls have affected several economies.
source by economist