- We do not expect Bank of Japan (BoJ) to announce additional QE in connection with tomorrow’s early morning monetary meeting. Recent economic data have been better than expected and if anything, BoJ’s view of the economy will be slightly more positive. In addition, the surprise expansion of BoJ’s QE programme at its previous monetary meeting has so far been successful.
- We estimate that the size of BoJ’s monthly asset purchases in the remainder of 2012 will triple compared with 2011 and that BoJ’s balance sheet will expand by about 20% in 2012. While the size of Japan’s QE still trails other major central banks, BoJ is at least starting to catch up. In addition, the 1% inflation target could open up for continued expansion of BoJ’s QE programme next year, when most other major central banks are expected to go on hold.
- It appears that the surprise QE announced at the previous meeting has increased the credibility of Japan’s attempt to “draw a line in the sand” on the strong JPY. Should the appreciation of JPY resume it will be met by further QE and most likely intervention if USD/JPY again breaks below 76.
- With growth likely to be relatively resilient in H1 12 on the back of reconstruction, we do not expect BoJ to announce additional QE in H1 12. However, the ceiling for asset purchases could be raised further in H2 12 tocreate space for continued asset purchases in 2013. Surprise easing at previous BoJ meeting has been a success
- Economic data have been substantially better than expected. GDP growth for Q4 11 was revised higher and now shows just a slight 0.7% q/q AR contraction after a solid 7% q/q AR expansion in Q3 11. In addition, recent data like industrial production and retail sales suggest GDP growth could exceed 3% q/q AR in Q1 12. Hence, if anything, BoJ’s view of the economy will probably be slightly more positive.
- BoJ’s action on 13 February has so far been very successful and for a change it appears that BoJ has gained some credibility in financial markets regarding its policy to stem the appreciation of JPY. Since 13 February JPY has depreciated by about 6% both against USD and in effective terms. While there are multiple reasons for the weaker JPY, the more aggressive monetary easing by BoJ does appear to have made an important contribution.
Bank of Japan early Tuesday morning CET will announce its decision from this week’s two-day monetary meeting. At its previous meeting on 13 February BoJ surprised the market by expanding the ceiling for its asset purchase programme by JPY10trn to JPY30trn. The assets eligible for purchase by BoJ under its asset purchase programme include government bond, corporate bonds, commercial paper and exchange traded funds. BoJ’s QE programme also includes the provision of loans to banks at fixed extraordinary low interest rates for 3-month (JPY20trn) and 6-month (JPY15trn) maturities. Altogether the size of BoJ’s QE programme now stands at JPY65trn.
BoJ’s easing move on 13 February was relatively aggressive. As BoJ intends to utilize its current asset purchase limit by the end of 2012, the implication is that the pace of the asset purchases will increase substantially. So far only JPY11trn of the asset purchase programme have been utilized, which means that for the remainder of 2012 the average monthly asset purchases will have to be JPY1.9trn, compared to just JPY0.7trn in 2011. Hence, the pace of asset purchases will close to triple in 2012 compared to 2011.
According to our calculation asset purchases will expand BoJ’s balance sheet by about 20% in 2012. This is still relatively modest compared to the recent expansion of other major central banks’ balance sheets in recent years (see chart), but it now appears that BoJ’s QE has finally started to catch after having trailed other major central banks substantially.
BoJ also announced a 1% inflation target in connection with the previous monetary meeting. The consumer price measure that BoJ targets (CPI excl. Fresh food) is still declining and according to our forecast it will still be below 0.5% y/y by the end of 2012. Hence, if BoJ is really committed to its new inflation target it should arguably continue to purchase assets next year. However, this is where BoJ’s communication has not been clear. Does undershooting the inflation target just mean that the leading interest rate will stay extraordinarily low or does it also mean that asset purchases will be continued?
We do not expect additional QE in the coming months
We do not expect BoJ to announce any additional QE in connection with this week’s monetary meeting.
Going forward the most important question will be BoJ’s commitment to its new inflation target. The suspicion remains that the easing move on 13 February was mainly driven by external political pressure and less by real conviction by the BoJ board members of the need for a more aggressive monetary stance. For that reason the release of the minutes from the 13 February monetary meeting on 16 March could prove to be more interesting than tomorrow’s statement.
With GDP growth poised to rebound in Q1 (possibly above 3% q/q AR), we do not expect BoJ to announce additional QE in the coming months unless JPY for some reason resumes appreciating. The purpose of Japan’s FX intervention policy remains solely to stem the appreciation of JPY. Because Japan’s intervention policy has been criticized by both the US and the EU, we do not expect to see renewed intervention unless USD/JPY revisits earlier lows below 76. Overall Japan’s policy of attempting to “draw a line in the sand” on a stronger JPY has gained credibility. The market increasingly understands that a substantial appreciation will be met by more aggressive monetary easing and possibly even renewed intervention in the FX market.
In our view the ceiling for asset purchases could be raised further in H2 12 to make room for continued asset purchases in 2013.