Bank Of Japan Unlikely To Announce Additional Stimulus

Bank Of Japan (BoJ) in our view is unlikely to announce any additional stimulus in connection with its monetary meeting tomorrow. At its last meeting just three weeks ago BoJ maintained its inflation forecast, meaning it still believes it will be able to reach its 2% inflation target at some stage in 2015. Data released last week showed that GDP growth in Q3 slowed to 1.9% q/q ann. from 3.8% q/q ann. and there has been some speculation that BoJ could soon be forced to respond with further easing. The likelihood that BoJ announces additional stimulus in connection with this week's monetary meeting is, in our view, extremely low. First, the slowdown in GDP growth in Q3 has already been factored in the revised macroeconomic forecast BoJ published at its previous meeting. Second, September and October data has so far been strong, suggesting GDP growth will rebound above 3% q/q ann. again in Q4.

At this stage, we do not see any reason why BoJ should start to question the effectiveness of its monetary policy. Growth in credit and the broad money supply measures continue to accelerate, suggesting that the aggressive expansion in the monetary base is spilling over into the real economy and the recovery appears to be on track despite the slowdown in Q3. In addition, consumer prices are out of deflationary territory, albeit the pace of the increase in inflation will probably slow substantially in the coming months. Hence, monetary policy will, in our view, be on autopilot until Q2 next year, which means that the current pace of expansion of the monetary base (already very aggressive) will be maintained.

Looking further ahead, GDP is poised to slow markedly in Q2 14 in the wake of the planned increase in the sales tax. Hence, tapering is off the agenda next year in Japan. On the contrary, we believe BoJ could be forced to ease monetary policy even more aggressively at some stage in Q2 next year. For that reason we see further JPY weakness in 2014. However, it is possible that JPY could strengthen slightly in the wake of this week's BoJ meeting, as a slight hope that BoJ could possibly ease further soon has probably sneaked into the market after the slower growth in Q3.

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