The Bank of Japan’s small expansion of monetary easing Friday could be the warmup for a bold offensive next time around in concert with fiscal policy moves.
The central bank’s statement on the “enhancement of monetary easing” drew attention not so much for its immediate impact, as for the pledge to “conduct a comprehensive assessment” of economic and price developments when the policy board next meets. This is aimed at hitting the target of 2% price growth “at the earliest possible time” — phrasing that inevitably calls to mind the possibility of further easing. BOJ Gov. Haruhiko Kuroda, for his part, did not rule out that interpretation when speaking to media after the meeting.
The governor emphasized the importance of a healthy mix of fiscal and monetary measures. Most likely, any expanded easing will complement whatever large-scale stimulus the government has in store.
On its own, bold fiscal spending funded by Japanese government bonds would put upward pressure on long-term interest rates by sucking up capital from the private sector. Adding stronger monetary easing to the mix combats that pressure, maximizing the impact of stimulus. Such a combination also would likely be easier for the BOJ to swallow than bolstering the economy with monetary policy alone.
The central bank’s policy board will next meet for two days starting Sept. 20 — good timing in relation to fiscal policy mileposts. Prime Minister Shinzo Abe’s government will unveil its stimulus package Tuesday. By the end of August, government ministries and agencies will have put in funding requests for the fiscal 2017 budget. Another supplementary budget for this fiscal year will be brought before the Diet when an extraordinary session convenes in September.
Many market analysts predict the Bank of Japan will further loosen monetary policy at its upcoming meeting, to bolster flagging inflation expectations and price trends, a recent survey shows.
Nikkei Quick News conducted a survey of “BOJ watchers” — economists at banks and brokerages who are familiar with the central bank’s thinking — on July 19-24. The results, released Monday, showed 22 out of the 28 analysts expected the BOJ to take additional easing steps at the monetary policy meeting scheduled for Thursday and Friday.
Many BOJ watchers believe the bank will take interest rates further into negative territory and step up purchases of exchange-traded funds; few predicted more purchases of government bonds.
The government is set to put together its latest economic policy package as early as the end of July. Speaking to reporters in Chengdu, China on the sidelines of a meeting of the Group of 20 finance ministers and central bank chiefs, BOJ Gov. Haruhiko Kuroda said Saturday that if a government takes fiscal steps while a central bank is simultaneously easing monetary policy, it has a great economic impact. Kuroda reiterated the bank will take additional measures, if necessary.
Contrary to conventional wisdom, we think monetary policy remains an important variable for asset prices.Interest rates and foreign exchange are two dimensions of the price of money. There is a relationship, even if it is not linear or temporally consistent.
Moreover, as a great discounting mechanism, the markets often price in the likelihood an event before it happens. In our day-to-day lives, causes take place before the effects by definition, but in the markets, sometimes, the effect comes place before the cause. The effect was selling yen since earlier this month, for example, and the cause is the Bank of Japan meeting on July 28-29.
A couple of days before the BOJ meets the Federal Reserve Open Market Committee will gather. While there is much uncertainty about what the BOJ will do, there is great confidence in the outcome of the FOMC meeting–nothing. This does not mean that the meeting is unimportant.
Bank of Japan Governor Haruhiko Kuroda said on Saturday he would ease policy further if necessary to achieve its 2 percent inflation goal, while reiterating a commitment to continue with the current stimulus until prices are anchored there.
Speaking to reporters on the sidelines of a G20 meeting of finance ministers and central bankers in the southwestern Chinese city of Chengdu, Kuroda maintained an upbeat view on the Japanese economy and price outlook in spite of rising market expectations for more BOJ monetary stimulus.
A majority of economists polled by Reuters expect the BOJ to ease policy next week, forecasting a combination of measures in another attempt to kick-start inflation.
“If the economy’s (recovery) trend continues, leading wages and prices to rise in a virtuous cycle, which is continuing, prices will eventually rise to the 2 percent price stability goal,” Kuroda said.
Attention shifts squarely to the US next week as investors watch for the latest monetary policy decision from the Federal Reserve, second quarter economic growth figures and the Democratic convention.
Here’s what to watch in the week ahead.
After Melania Trump’s speech writer admitted to lifting lines from Michelle Obama and Ted Cruz refused to endorse Donald Trump at the Republican convention, investors turn their attention to the Democratic National Convention that gets underway in Philadelphia on Monday.
Hillary Clinton is expected to accept her party’s nomination for the presidential race on Thursday and delegates are also expected to ratify her pick for vice president. President Barack Obama is slated to speak on Wednesday.
Even as US economic data and global financial conditions have improved since the Brexit vote, policymakers at the Federal Reserve are expected to leave interest rates unchanged when they meet next week. However, the language in the statement is expected to reflect the improved tone of the data as job creation in the US rebounded last month and the so-called Federal Open Market Committee is expected to leave its options open for the timing of the next increase.
“Markets have recently repriced somewhat higher the chances for rate hikes this year, with around a 25% market-implied probability by September, and just over a 45% probability by December,” Ethan Harris, economist at Bank of America, notes. “We would not expect the July FOMC statement to materially change those probabilities, as we do not anticipate any substantive changes: the Fed is still watching the post-Brexit data evolve and should remain cautious overall.”
Country’s foreign exchange reserves declined by $1.228 billion to $361.943 billion in the week to July 8 due to a fall in foreign currency assets, the Reserve Bank said today.
Last week, the reserves had surged by $2.374 billion to $363.171 billion.
Foreign currency assets (FCAs), a major component of the overall reserves, declined by $1.218 billion to $337.493 billion in the reporting week, RBI data showed.
FCAs, expressed in dollar terms, include the effect of appreciation/depreciation of non-US currencies such as euro, pound and yen held in the reserves.
Gold reserves remained unchanged at $20.576 billion.
The country’s special drawing rights with the International Monetary Fund were down by $3.6 million to $1.484 billion and the reserve position dipped by $5.9 million to $2.389 billion, the central bank said.
The yield on Japan’s benchmark 20-year government bond Wednesday fell below zero for the first time ever and the 30-year yield was just 0.015%, as investors seek safety after Britain’s vote to leave the European Union.
The 10-year Japanese government bond yield also fell, hitting a record low of minus 0.275%.
Global markets reacted swiftly after two big British asset managers blocked investors from pulling money out of real-estate funds, pushing the British pound to a 31-year low. As in the initial days after the Brexit referendum, the Japanese yen was often the safe haven of choice for investors, even more so than the U.S. dollar.
The yen rose to around 100.75 to the dollar in Wednesday midday Tokyo trading, up from around 102 yen to the dollar in midafternoon Tuesday trading in Tokyo.
“The trading is completely pound-driven,” said Marito Ueda, a director at FX Prime by GMO, a Tokyo-based foreign-exchange dealer. “We are seeing a pattern similar to soon after Brexit. The pound is sold, the euro is sold and the yen is the most widely bought currency amid the risk-off mood.”
Among yen-denominated investments, government bonds were benefiting while investors shunned stocks. The 20-year Japanese government bond yield, which was above 1% as recently as last December, stood at minus 0.005% early Wednesday afternoon Tokyo time after touching zero in the morning.
The Bank of Japan’s dogged effort to spur inflation through massive monetary easing has failed to yield the intended effect so far, with consumer prices stuck in a downward trend.
Japan’s monetary base topped 400 trillion yen ($3.9 trillion) for the first time at the end of June, reaching 403 trillion yen, BOJ documents released Monday show.
Back in April 2013, BOJ Gov. Haruhiko Kuroda pledged to double the money supply in two years. “The market would be flooded with a huge amount of cash beyond the conventional wisdom of market participants,” the central bank chief said at that time.
The underlying logic was that abundant cash would drive long-term interest rates low, creating a virtuous circle of increased bank lending and active stock investment that would ultimately bolster the economy. Lower interest rates should weaken the yen and brighten consumer outlooks, helping Japan’s economy overcome deflation.
The monetary base has grown 170% in the little over three years since then, accounting for some 80% of Japan’s nominal gross domestic product, compared with 20% in the U.S. and the eurozone. The central bank upped the ante in October 2014 with more easing, promising to boost the money supply by 80 trillion a year. When that did not do the trick, the bank decided on a negative interest policy in January this year.
Global government debt with negative yields has increased by more than a trillion dollars since the end of May after the UK’s Brexit vote sent investors scrambling for safe haven assets.
The amount of sovereign debt with negative yields, meaning if investors hold the bonds to maturity they will get back less they put in, was $11.7tn on Monday, a rise of $1.3tn since the end of May, according to data from Fitch Ratings.
Frenzied demand for high-rated government debt in the wake of Great Britain’s vote to part ways with the EU have sent sent yields a swath of haven bonds plumbing new lows.
“Worries over the global growth outlook, further fueled by Brexit, have continued to support demand for higher-quality sovereign paper in June,” Fitch said.
Strikingly, debt of increasingly long maturities has fallen into negative-yielding territory, with the level of bonds with maturities of seven years or more swelling to $2.6tn from $1.4tn at the end of April.
Many market analysts think the Bank of Japan will convene an emergency policy meeting in response to the potential fallout if British voters decide Thursday in favor of leaving the European Union.
“We are always prepared to engage in additional monetary easing, but I will offer no comment regarding an unscheduled meeting,” BOJ Gov. Haruhiko Kuroda said June 16.
A decision for a British exit, or Brexit, from the EU may push the Japanese currency below 100 yen to the dollar, several observers say. If that happens, the BOJ likely “won’t wait for the regular meeting scheduled for July 28-29 and will opt to open a special meeting,” said Kyohei Morita at Barclays Securities Japan.
Central banks in Japan and the West already have settled on a framework for supplying markets with a massive infusion of dollar-denominated funds if warranted, making a special BOJ meeting unnecessary. But the BOJ should proceed with such a meeting in order to “send a strong message,” said Yuji Saito of Credit Agricole.