The Bank has left its key policy settings unchanged, maintaining the short-term interest rate at -0.1% and 10y JGB yield target at around 0%. The guidelines for assets purchases were also left unchanged.
The BoJ has been focusing on increasing liquidity and lending support to businesses affected by the coronavirus pandemic, in an attempt to prevent a liquidity problem from turning into a solvency crisis. The new funding provisioning measures to help the SMEs were a part of the Bank’s JPY75-trillion Special Program to Support Financing in response to COVID-19. The Bank has also extended the duration of these measures by six months until end-March 2021, as COVID-19 is seen having a lasting impact on the economy. Application of a positive interest rate to the outstanding balances of current account balances held by financial institutions could also act as an extra incentive for them to lend.
Earlier data showed that inflation weakened further in April, with core inflation slipping into negative territory. Headline inflation eased to 0.1% y/y in April, from 0.4% y/y prior. Lower energy prices continued to be a drag on headline inflation, while fresh food prices remained firm. Excluding fresh food prices, core inflation was down by 0.2% y/y in April. We believe these near-term disinflationary forces will drive inflation lower to zero this year, and weak inflation will likely see the BoJ maintain its massive stimulus.
We continue to believe that monetary policy will focus on enhancing liquidity and lending support going forward. A further cut in negative policy rates will be unnecessary at this juncture as this would inflict more profitability damage on Japanese banks.