BOJ monetary policy meeting announcement
- Keeps monetary policy steady, pledges to increase monetary base at annual pace of 80 trln yen
- Decision was made by 8-1 vote (Kiuchi votes against policy decision)
- Keeps assessment of Japan’s economy unchanged
- BOJ sees economy as continuing to recover moderately
- Some data show weak developments in inflation expectations
Headlines on Bloomberg and Reuters
Nothing to surprise, no change was a near unanimous expectation
Next from the BOJ … press conference from Governor Kuroda, which will start at 0630GMT
A few key lines from Bank of Japan boardmember Yutaka Harada help explain why the central bank held fire at its October 30 meeting.
Mr Harada, speaking in Tochigi on Wednesday, was a little more downbeat — one is tempted to say realistic — about the economy, than BoJ chief Haruhiko Kuroda.
He acknowledged as much, saying his outlook on the economy and inflation is “slightly weaker” than the central bank’s. He also cited a number of overseas risks: slowing emerging markets, especially China; an “unexpected shock” from the US lifting interest rates, or Europe’s debt crisis resurfacing.
In the event these events hurt Japan, the BoJ “should implement additional monetary easing without any hesitation,” he said.
But, Mr Harada was less concerned about the forces of domestic support, i.e. consumption and exports. While neither is exactly firing on all cylinders, he has a similar outlook to Mr Kuroda, which emphasises how the tight labour market will create a “virtuous cycle of income to spending.”
And here’s the key: while almost half of economists expected the BoJ to cut its inflation target last month, then respond with renewed stimulus efforts, Mr Harada downplayed the need to hit the BoJ’s 2 per cent inflation target right away:
Bloomberg with comments from Barclays and Dai-ichi on the outlook for the Bank of Japan.
In the wake of last week’s decision from the BOJ to stand pat on policy
Kyohei Morita, chief Japan economist for Barclays:
“What we learned is that the BOJ won’t apply monetary policy to meet its time-frame commitment”
He now sees no likelihood of a change in policy in the foreseeable future and added that “it’s almost meaningless to predict it on the premise of the BOJ’s new commitment on the time-frame.”
Hideo Kumano, chief economist at Dai-ichi Life Research Institute:
Has switched from projecting a boost last week to now seeing no further stimulus
“Kuroda delivered the message that he won’t move until a huge shock takes place in Japan’s economy,” said Kumano, who is a former BOJ official. “Mere swings in the economy won’t convince the BOJ to move.”
The Bloomberg piece is here, for more
The Bank of Japan is caught in a dilemma. The central bank has fallen behind in its pursuit of inflation, but speeding up asset purchases could produce the wrong kind of price growth even as wages remain sluggish.
The trend in prices has been one of steady improvement, BOJ Gov. Haruhiko Kuroda stressed to reporters Friday.
He and the rest of the bank’s policy board had just pushed back the target date for reaching its 2% price growth target by six months, but they did not increase monetary easing.
Excluding fresh food and energy, consumer price index growth did quicken to 1.2% year on year in September, up from 1.1% the month before. This marks the fastest pace since Kuroda’s BOJ launched its current quantitative easing program in April 2013.
But with energy prices factored in, inflation remained negative for a second straight month. This reflects a drop in the price of crude oil that will eventually fade into the background. But if inflation stays close to zero after that, consumer expectations of rising prices may remain low.
“We have to keep a careful watch for changes in the trend,” a senior BOJ official said.
The following are the expectations for today’s BoJ meeting as provided by the economists at 13 major banks and some thoughts on the JPY into the event as provided by the FX strategists at these banks. Out of the 13 banks, 6 see no easing, 6 see further easing, and 1 bank (Credit Suisse) puts it at 50-50 chance.
Goldman Sachs (Further Easing): Our base case is for the BoJ to undertake: a maturity extension of existing JGB purchases, an increase in the run-rate of JGB purchases from 80 to 90 JPYtn per year, and an increase in ETF purchases from 3 to around 5 JPYtn. This call this week is a close one, but even if policy is unchanged at this week’s meeting we think the BoJ will ultimately need to loosen policy as their inflation forecast moves further out of sight – we see further $/JPY upside as a result. We think $/JPY should move through 125 in the wake of the meeting should the BoJ ease as we expect. With further upside expected from our base case and with an IOER cut an outside chance, the risk-reward in long $/JPY looks favourable into the meeting.
SocGen (Further Easing): Our Japan economists expect the annual pace of increase in the BOJs monetary base from Y80trn to Y85trn as they accept that the FY2016 inflation forecast 1.9%) unrealistic. We would expect a bigger FX reaction to a failure to ease (USD/JPY down) than to the move we look for, which is more likely to be equity-friendly than yen-negative. Psychologically, the key is whether the BOJ move is enough to trigger a break throughout of the USD 118-122 range that has been holding for the last two months. If the BOJ does ease, and the topside of that rate holds, we’ll look to use that to buy yen.
Barclays (Further Easing): Our expectations for a further BoJ easing is a close call and we believe scope for further yen weakness is limited due to undervaluation, a decisive easing by the BoJ could put a sharp upward pressure on USDJPY, at least in the short term. When the BoJ surprised the markets with QQE2 last October, USDJPY rallied by more than 3 yen on the day. From a technical perspective, a break above 121.75 would signal higher. Our greater targets are towards the 125.30/125.85 range highs.
Comments from Bank of England Deputy Governor Minouche Shafik at the IMF conference in Lima this weekend:
- “The risk inherent in this build up of leverage (in emerging markets) has motivated calls for a normalisation of advanced economy monetary policy sooner rather than later
- But tightening advanced economy monetary policy solely to discourage further borrowing could make the job of getting inflation back to target more difficult.”
Shafik said it ws prefereable to use other tools, such as macroprudential tools, rather than monetary policy
Benoit Coeure (ECB board member) also spoke on financial stability at the IMF conference, saying that low rates for a long time creates challenges. On inflation, he said it will come back to target only very slowly.
Neither comment sis controversial.
Former vice finance minister Eisuke Sakakibara says USD/JPY won’t hit 125.00
The second wave of US dollar weakness is beginning to weigh on the US dollar today as longer-term traders and real money exit USD positions.
Former Japanese vice finance minister Eisuke Sakakibara is known as Mr Yen for managing the currency in his tenure and he now infrequently comments on its value as a professor at a Japanese university.
Eamonn had the headlines from his comments to Bloomberg earlier but the full story is up now.
“The period of cheap yen is beginning to be over and I think gradually the yen-dollar rate will move toward the range of 115 to 120,” Sakakibara, 74 said in an interview in Tokyo. It is unlikely that the Japanese currency will decline toward 125 for “some time to come,” he added.
The most important piece of news announced today was also, as usually happens, the most underreported: it had nothing to do with US jobs, with the Fed’s hiking intentions, with China, or even the ongoing “1998-style” carnage in emerging markets. Instead, it was the admission by ECB governing council member Ewald Nowotny that what we said about the ECB hitting a supply brick wall, was right. Specifically, earlier today Bloomberg quoted the Austrian central banker that the ECB asset-backed securities purchasing program “hasn’t been as successful as we’d hoped.“
Why? “It’s simply because they are running out. There are simply too few of these structured products out there.”
So six months later, the ECB begrudgingly admitted what we said in March 2015, in “A Complete Preview Of Q€ — And Why It Will Fail”, was correct. Namely this:
… the ECB is monetizing over half of gross issuance (and more than twice net issuance) and a cool 12% of eurozone GDP. The latter figure there could easily rise if GDP contracts and Q€ is expanded, a scenario which should certainly not be ruled out given Europe’s fragile economic situation and expectations for the ECB to remain accommodative for the foreseeable future. In fact, the market is already talking about the likelihood that the program will be expanded/extended.
… while we hate to beat a dead horse, the sheer lunacy of a bond buying program that is only constrained by the fact that there simply aren’t enough bonds to buy, cannot possibly be overstated.
Among the program’s many inherent absurdities are the glaring disparity between the size of the program and the amount of net euro fixed income issuance and the more nuanced fact that the effects of previous ECB easing efforts virtually ensure that Q€ cannot succeed.
There are two events this week that will shape the investment climate potentially for the rest of the year. The first is the Bank of England meeting. The following day is the US employment report.
Both events take on added significance. The Bank of England enters a new era. The Monetary Policy Committee meets as usual, but shortly after it, the minutes will be published, and this will contain the vote itself. There will no longer be a couple week delay. It will be interesting to see if other central banks, including the Federal Reserve and Bank of Japan adopt a similar approach over the medium term.
It took the European Central Bank more than a decade to see the wisdom of providing some record. It may be too much to expect it to make it nearly immediately available.
Also, the BOE will release its Quarterly Inflation Report at roughly the same time. This report has become an integral part of assessing the policy stance. From giving little information at the time of the MPC meeting, the BOE is going to deluge the market with information. It will dominate August 6 but on what should investors focus?
Two considerations will ultimately generate the underlying signal for investors. The first is the vote itself. Many observers expect three MPC members to dissent: Weale, McCafferty, and Miles. If any more dissent, sterling’s reaction is likely to be more pronounced, and the impact on UK rates may be dramatic. It would drive home what has been a tail-risk, namely a November rate hike. On the other hand, this is Miles’ last meeting. His vote might be dismissed by investors, as his successor, Gertjan Vlieghe, has wisely not shared his views.