MNI REVIEW: BOJ On Hold; Upgrades Japan, Overseas Outlooks

The Bank of Japan left monetary policy unchanged Thursday as it sees Japan's economy recovering moderately after the record contraction in the second quarter, with the short-term policy interest rate maintained at -0.1% and the long-term interest rate target at 'around zero percent'.

The BOJ retained its forward guidance for policy rates, saying it "will closely monitor the impact of the novel Covid-19 and will not hesitate to take additional easing measures if necessary, and also it expects short- and long-term policy interest rates to remain at their present or lower levels."

Policymakers continue to monitor the flow of liquidity to companies amid sluggish profits and sales, with a close eye on the availability bank lending.

UPS ECONOMIC ASSESSMENT

The BOJ upgrade its assessment on both the domestic and overseas economies as activity resumed at home and abroad.

"Japan's economy has started to pick up, with economic activity resuming gradually, although it has remained in a severe situation due to the impact of the novel Covid-19 at home and abroad," the policy statement said.

The previous view was "Japan's economy has been in an extremely severe situation with the impact of Covid-19 remaining at home and abroad, although economic activity has resumed gradually."

"Overseas economies also have started to pick up from a state of significant depression," the statement added.

The near-term view was also upgraded, although the BOJ maintained its cautious outlook.

"Japan's economy, with economic activity resuming, is likely to follow an improving trend through the materialization of pent-up demand and supported by accommodative financial conditions and the government's economic measures," the BOJ said, although noting any pick-up would be moderate while Covid-19 prevailed..

The BOJ also upgraded its assessment of exports and industrial production as they rebounded after falling sharply in Q2.

The assessment of capital investment, however, was downgraded from the previous meeting. "Fixed investment has been a on a declining trend," it said, with Inflation expectations also somewhat weaker.

UNCERTAINTIES

As for risks, the BOJ said, the virus and its impact on the global economy remained highly uncertain

"In addition, it is necessary to pay close attention to whether, while the impact of Covid-19 remains, firms' and households' medium- to long-term growth expectations will not decline substantially and the smooth functioning of financial intermediation will be ensured with financial stability being maintained," the statement said