Japanese Economy Poised To Recover Markedly In Coming Months

As expected, the Bank of Japan (BoJ) did not announce any additional easing in connection with today's monetary meeting. This was the last meeting for governor Masaaki Shirakawa and his two deputy governors. It will be up to the new BoJ leadership, expected to be headed by Haruhiko Kuroda, to decide on a future easing strategy to support the BoJ's new 2% inflation target. For this reason, the BoJ was widely expected to stay on hold in connection with today's meeting.

Today's proposal by board member Sayuri Shirai to make the BoJ's asset purchase programme open ended this year on, was rejected by the other board members. The proposal was a slight surprise, as Shirai is regarded as neutral and has been a loyal supporter of the relatively hawkish Shirakawa on the BoJ Board. The board rejected a proposal by Ryozo Miyao (a dove) to make a stronger commitment to keeping the leading interest rate close to zero. The two rejections should not be regarded as resistance against further easing, but rather as an acknowledgement that it is now up to the new BoJ leadership to decide on future easing strategy. This said, all the different proposals for various easing measures suggest that it could be hard to reach a consensus on an easing strategy.

Looking ahead, we think that Kuroda will want to leave a mark at his first BoJ meeting as BoJ governor on April 3-4 , when we expect relatively aggressive easing. We expect the asset purchase programme to be expanded further, possibly made open ended from this year as proposed by Shirai at today's meeting. It also looks increasingly likely that the maturities of the BoJ's government bond purchases could be increased beyond three years. Finally, a cut in the interest rate on banks' reserves at the BoJ from 0.1% to 0.0% cannot completely be ruled out either. Relatively aggressive easing at the next BoJ meeting is already priced in the market. With the Japanese economy poised to recover markedly in the coming months, we also expect the BoJ to remain on hold for a substantial period after the 3-4 April meeting. This said, we remain in a monetary regime where any substantial appreciation of the JPY is likely to be met with further easing.

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