(1) MONETARY POLICY AND LONG-TERM YIELD

Price stability target unlikely to be met in FY2015; BoJ to sustain monetary easing

The BoJ continues to carry out the quantitative and qualitative monetary easing introduced in April 2013. At its July Monetary Policy meeting, the BoJ reiterated its outlook that the 2% price stability target rate would be achieved in FY2015. That said, the BoJ outlook is considerably more bullish than private sector economists'. Private sector economists have raised their real GDP growth forecasts for this fiscal year, narrowing the forecast gap with the BoJ, and as a result the CPI outlooks have also been converging (Figure 15). However, since private sector and BoJ growth forecasts for FY2015 differ by a mere 0.2%pt, the two CPI forecasts are unlikely to align because of the supply-demand gap once again improving more than the private sector expects. The BoJ will likely continue to maintain large-scale monetary easing while keeping a close eye on the effects.

Long-term yield to rise slowly as BoJ large-scale monetary easing absorbs upward pressure from improving fundamentals

The yield on the 10Yr JGB recently fell to around 0.5% level and has remained low. This is due to a tighter supply-demand of JGBs because of the BoJ's huge purchases as well as lower yields in the US and Europe. As the Japanese economy's growth momentum and inflation rate gain steam and US yields rise as expectations of a rate hike build, upward pressure on Japan's long-term yield is also likely to increase (Table 1). However, continued BoJ quantitative and qualitative monetary easing are expected to absorb such upward pressures, and the long-term JGB yield will likely rise only at a slow pace.