This week, it’s all about the central banks, and monetary policy-watchers will have their plates full with decisions on deck from the US, UK, Russia and Japan.
Here is what investors will be watching in the days ahead:
It’s that time of year, again — Federal Open Market Committee policymakers are set for their once-every-two-months powwow in Washington on Wednesday to decide whether to raise interest rates for the second time this year. Analysts fully expect them to do so — although some on Wall Street have expressed their doubts about whether economic conditions — including softness in first-quarter GDP growth and stubbornly slow inflation, even as unemployment remains low — fully support its charge forward.
The real focus will be on Fed chair Janet Yellen’s press conference following the meeting. She is likely to give some insight into how the Fed perceives the mixed bag of economic readings and whether that will knock the central bank off of its expected path for the year.
There could also be some adjustments on tap for the Fed’s inflation or unemployment projections in light of recent data. And, more importantly, Ms Yellen may offer some insight on the Fed’s plans for starting to reduce the size of its $4.5tn balance sheet, which bank officials have been teasing for several months now. The biggest question analysts are asking is whether that plan gets debuted at the September meeting or if central bankers would prefer to wait until December.
UBS economists offered this to help read the tea leaves next week:
The Bank of Japan has stepped up purchases of exchange-traded funds as part of its monetary easing policy, with the balance surging to 15.93 trillion yen ($144 billion) as of March 31.
The total marks an 80% rise from a year earlier and more than a sevenfold increase since the central bank kicked off its quantitative and qualitative easing — adding riskier assets to its balance sheet — in April 2013. ETF purchases have gradually increased under the unconventional policy, expanding to 6 trillion yen a year in July 2016 from 3.3 trillion yen.
The bank apparently buys frequently on days when the stock market dips in the morning, serving to stabilize share prices.
“The BOJ’s ETF purchases help provide resistance to selling pressure against Japanese stocks,” says Rieko Otsuka of the Mizuho Research Institute.
Should the current pace of buying continue, the BOJ’s ETF holdings would reach about 30 trillion yen in about two years. The market capitalization of the Tokyo Stock Exchange’s first-section companies comes to 550 trillion yen.
The bank’s growing market presence has raised concerns about the repercussions when the easing policy eventually winds down. When speculation of a BOJ exit grows, the anticipated cutbacks on ETF purchases would accelerate selling of Japanese stocks. As a precaution against a sharp market decline, “the BOJ many need to set aside provisions,” Otsuka says.
With the Fed contemplating whether to hike again next month and start “normalizing ” its balance sheet before the end of 2017, the two other major central banks are facing far bigger problems.
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Two months after the BOJ quietly started tapering its QE program, when it also hinted it may purchase 18% less bonds than planned…
… Governor Haruhiko Kuroda admitted last week that the Bank of Japan’s bond holdings are currently growing at an annualized pace of only ¥60 trillion ($527 billion), 25% below the bottom-end of its policy range, and confirming that without making any formal announcement, the BOJ has quietly followed the ECB in aggressively tapering its bond buying program.
Two weeks ago Bank of America caused a stir when it calculated that central banks (mostly the ECB & BoJ) have bought $1 trillion of financial assets just in the first four months of 2017, which amounts to $3.6 trillion annualized, “the largest CB buying on record.”
The number of listed Japanese companies declaring bankruptcy in the 2016 financial year fell to zero for the first time since the collapse of the bubble. The zero-bankruptcy feat, which has been achieved just six times since 1964 was last achieved in 1990.
Bankruptcies among listed companies have been consistently low since the Abenomics economic revival campaign got going in 2013 – the year the Bank of Japan began its qualitative and quantitative easing programme. In February last year, the central bank introduced its negative interest rate policy, underscoring the historically low debt servicing burden on Japanese companies.
Just two bankruptcies of listed companies were logged in fiscal 2015, according to Teikoku Databank. The all-time peak of 45 was reached in 2008 at the height of the global financial crisis.
According to Tokyo Shoko Research overall bankruptcies also fell in Japan in calendar 2016 – both in terms of the number of companies (a 4.6 per cent drop to 8446) and in terms of total value (a 5.0 per cent drop to Y2trn).
But analysts point out that those figures do not tell the full story as they track only companies that have undergone court-led liquidation.
Tokyo Shoko Research survey in August last year showed that in a year where around 8,500 companies went through court led bankruptcy, a total of about 27,000 either suspended or dissolved their businesses.
The euro climbed to its strongest level against the dollar since mid-February as the markets reassessed the odds of a December rate rise by the European Central Bank.
A day after mildly hawkish comments from European Central Bank president Mario Draghi helped send the single currency higher, the euro tacked on another 0.9 per cent to hit a three week high of $1.0673 following a report that the ECB had discussed whether rates could rise before it ends its bond buying programme.
However, two people familiar with the discussions denied there had been any meaningful debate over the issue. One person said some members are keen for the council to consider raising the deposit rate, now at minus 0.4 per cent, before it ends its quantitative easing programme.
The ECB plans to keep on buying bonds until the end of this year, and is considered likely to extend the programme into 2018 — though at a slower pace than the current level of €60bn a month.
Against the pound, the euro was up 1 per cent at €1.1393 – a level last seen in mid-January. The currency also firmed more than 1 per cent against the Japanese yen at 122.83.
The Bank of Japan is poised to upgrade its three-year economic growth outlook in the final days of January in light of strong recent indicators, though stronger inflation forecasts will be a harder sell.
The central bank will compile its quarterly outlook on economic activity and prices at a two-day policy meeting beginning Monday. The report will outline the BOJ’s forecast for each of the three years through fiscal 2018,
The last report, released in November, pegged gross-domestic product growth at 1% for fiscal 2016, 1.3% for fiscal 2017 and a slim 0.9% for fiscal 2018. Discussions this time are expected to center on the first two years, with the fiscal 2017 growth forecast thought to be headed for the mid-1% range.
Signs for an upgrade are strong. The BOJ in December boosted its outlook for Japan’s economy as a whole for the first time in 19 months. Such goods as smartphone parts and automobiles are driving up exports and industrial production, while consumer spending on durable goods such as cars is on the rebound as well. Changes made late last year to the GDP calculation method will also give the figure a boost: companies’ research and development spending, which has shown consistent growth over the years, now counts as investment.
BOJ Gov. Haruhiko Kuroda said at a World Economic Forum panel discussion Jan. 20 that he expects Japan’s economy to grow by around 1.5% in fiscal 2016 and fiscal 2017, significantly exceeding the country’s potential growth rate.
With the world facing uncertainty over the new administration in Washington, the Japanese central bank is among the many keeping their eyes peeled.
The yen’s depreciation against the dollar since Donald Trump won the U.S. presidential election in November has given the Bank of Japan some much-needed breathing room, as a weaker home currency will likely buoy the economy and consumer prices here.
BOJ Gov. Haruhiko Kuroda welcomed the prospect of the yen softening on the back of a robust American economy, saying Trump’s planned tax cuts and infrastructure spending would lift the economies of the U.S. and the world.
The BOJ could watch from the sidelines without having to roll out more monetary easing — a particularly helpful development for a central bank nearly out of easing options.
“The specifics of economic policy under the Trump administration have not become clear,” according to BOJ Deputy Gov. Hiroshi Nakaso. But the bank apparently expects lower taxes and other anticipated economic measures to boost the economy.
The Bank of Japan may deliver a sunnier view of the country’s economy when its policy board meets next week, optimistic over steadying foreign economies boosting exports and production, as well as recovering consumption at home.
The central bank sees improvements in exports and production of automobiles and smartphone parts. It would mark the first upgrade in 19 months.
Since its March report, the BOJ has asserted that “Japan’s economy has continued its moderate recovery trend, although exports and production have been sluggish due mainly to the effects of the slowdown in emerging economies.” This time, it may alter or strike the “exports and production have been sluggish” language. Some at the bank have suggested removing the “trend” in “moderate recovery trend” to emphasize that the economy’s recovery is ongoing.
In addition to the bullish American economy, the deceleration in emerging economies has slowed since the summer. As the BOJ sees it, combined with the effect of the Trump rally in the stock market, the real economy is headed toward recovery. Exports to China such as smartphone components continue to grow, while at home, consumers are opening their wallets for fall-winter clothes.
“Income is increasingly going toward consumption,” said a BOJ official.