Bank Of Japan On Hold As Expected, Poised To Ease Further

Bank of Japan (BoJ) as expected did not announce any new stimulus in connection with today's monetary meeting after it raised its purchases in both September and October.

The non-action from BoJ at today's meeting should prove to be just a breather. With Japan in recession, political pressure for more easing intensifying and the BoJ board likely to be more dovish next year, BoJ remains on an aggressive easing path. We expect the target for BoJ's asset purchases to be raised by JPY10-15trn as soon as its next meeting in December. The inflation target could also be raised from 1% to 2% at some stage late next year.

Details
BoJ as expected did not announce any new stimulus measures at today’s monetary meeting after it expanded its target for asset purchases in both September and October. Specifically, the target for BoJ’s asset purchases was left unchanged at JPY 66trn and the target for the O/N money market rate was also left unchanged at 0%-0.1%. Both decisions were unanimous.

In the statement there were no major changes in BoJ’s view on the economy, see Statement from BoJ. BoJ expects "the economy to remain relatively weak for the time being" and the "year-on-year rate of change in CPI to remain at around 0 percent for the time being," meaning that inflation in the short run will not be moving closer to the 1% inflation target.

At the press briefing BoJ governor, Masaaki Shirakawa, came with some slightly hawkish comments. Among other things Shirakawa spoke out against raising the inflation target and negative interest rates.

There has been a slightly negative impart with the Japanese stock market declining in the wake of the announcement and JPY strengthening slightly overnight.

Assessment And Outlook
In our view, BoJ remains on a relatively aggressive easing path. The main drivers are that Japan technically appears to be in recession in H2 12, political pressure on BoJ for more will increase after the election on 16 December and the balance on the BoJ board is expected to shift decisively in favour of the doves when the terms of governor Shirakawa and his two deputy governors expire next year.

BoJ has already stepped up its monetary easing substantially. The planned asset purchases in Q4 are equivalent to 8% of GDP in Q4. As a comparison, Fed’s current purchases of mortgage bonds is equivalent to about 3% of GDP on an annual basis. Hence, BoJ’s monetary easing no longer appears to be trailing other major central banks.

We expect this pace of monetary easing to continue in 2013 and more importantly, we now also expect the asset purchases to be continued into 2014. The next BoJ meeting will be on 19- 20 December, just after the general election on 16 December. At that meeting we expect BoJ to increase the target for its asset purchases by JPY10-15trn.

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