Bank of Japan Sept 'Summary of Opinions': CPI on a declining trend

The Bank of Japan 'Summary of Opinions' from the September policy meeting, when the Central Bank conducted an overhaul of its monetary policy framework, has been released, noting that Japan's economy has continued its moderate recovery trend, but the year-on-year rate of change in the consumer price index (CPI) is on a declining trend as relatively weak developments have been observed in some indicators of private consumption.

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On the economy:

Japan's economy has continued its moderate recovery trend. Although the virtuous cycle in the economy has been maintained, it should be noted that firms' and households' sentiment are somewhat subdued.

Japan's economy has continued its moderate recovery trend, although exports and consumption have weakened.

The current fall in the propensity to consume is partly attributable to the subsequent decline in durable consumer goods demand that was stimulated by the measures implemented after the global financial crisis.

It is a relief that households' and firms' sentiment has remained stable amid high uncertainty, mainly associated with overseas economies.

High uncertainties surrounding the global economy are likely to remain for the time being

On prices:

Commodity prices have been fluctuating within a certain range -- albeit at a low level -- and the downward pressure on consumer prices is likely to gradually dissipate. Inflation expectations have maintained their uptrend in the somewhat longer term, but attention needs to be paid to inflation expectations having been under strong downward pressure through an adaptive formation mechanism.

In combination with monetary easing measures, the government's large-scale stimulus package that are to be implemented are expected to contribute to a rise in the economic growth rate and an improvement in inflation expectations.

The recent decline in medium- to long-term inflation expectations can be regarded as an indication that the inflation expectations are reverting from a temporary rise to the equilibrium level that is consistent with the current economic structure.

On negative rates:

The negative interest rate policy, in combination with JGB purchases, has pushed down shortand long-term interest rates substantially. However, it should be noted that the impacts, such 3 as on financial institutions' profits, financial markets, and the rates of return on life and pension insurance products, also have been substantial.

Maintaining soundness of financial institutions in Japan is important from the perspective of global financial system stability.

The effects of monetary easing should be analyzed in view of the following factors: (1) the impact on the profitability of financial institutions; (2) the impact of the lower profitability of financial institutions on the economy as a whole; and (3) the positive impact of monetary easing on the economy through channels other than financial intermediation. Among these, (2) and (3) are particularly important.

If the economy as a whole improves, the profitability of financial institutions will also improve on the back of a decline in credit costs, an increase in nominal interest rates, and an expansion of lending.

A decline in lending rates and a reduction of financial institutions' lending margins are not attributable merely to QQE but also to structural problems, such as a decline in the natural rate of interest, prolonged deflation, and excess saving in the corporate sector.