We no longer expect the Bank of Japan (BoJ) to announce any new easing measures in connection with its meeting on 31 October. The main arguments for our new view are as follows.
First, there has not been enough movement in the BoJ’s communication in a more dovish direction in the past month, albeit economic data has continued to disappoint. While the statement from the BoJ meeting on 4 September was a bit softer, the statement failed to acknowledge that the negative impact of the consumption tax hike in April is a major downside risk to the economy. In addition at the BoJ meeting on 8 August, no board member argued that additional easing might be needed soon according to the minutes from this meeting released earlier this week. In addition, Deputy Governor Kikuo Iwata in a speech on 11 September appealed for patience and overall stayed loyal to the latest BoJ statement. Iwata is possibly the biggest dove on the BoJ board, so we need to see him starting to deviate from the official BoJ line to have any reasonable hope of imminent BoJ easing.
Second, the recent sharp depreciation has also taken considerable pressure off the BoJ for more easing. We have been arguing that inflation could edge lower in coming months because the impact of a weaker yen had gradually started to wane. The recent sharp depreciation of the JPY has decreased this risk and we could even see inflation edge slightly higher in coming months.
Third, it now appears that fiscal policy will be tightened less than expected. While the BoJ has so far failed to acknowledge the downside risk relating to the consumption tax, the politicians have increasingly acknowledged this risk. Finance Minister Taro Aso – who in general is regarded as a fiscal hawk – has said that a supplementary budget with new stimulus needs to be prepared to be able to react immediately. The Economy Minister Akira Amari has even indicated that the planned consumption tax hike from 8% to 10% from October next year could be postponed. Less fiscal tightening in isolation reduces the need for additional monetary easing. We have previously argued that the BoJ would probably tend to respond proactively and rapidly with more easing to avoid Japan ending up with an unfavourable policy mix of less monetary easing and less fiscal consolidation. In our view, there is increasing risk that Japan will end up with this less favourable policy mix.
Fourth, in the recent month there has been increasing focus on the costs from the BoJ’s aggressive bond purchases. Some investment banks have been arguing that the BoJ is basically destroying the liquidity in the Japanese government bond market. This debate could make the BoJ more reluctant to expand its QE programme aggressively and possibly lead it to consider alternative easing measures. Alternative easing measures could be cutting the interest rate on excess reserves (currently 0.1%) or only expanding its QE programme modestly by mainly increasing its purchases of stocks through exchange traded funds (ETFs) and real estate investment trusts (REITS).
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