BoJ Preview: no more easing is needed in the near-term

June 18, 2015

The Bank of Japan (BoJ) isn’t expected to announce any new stimulus measures following its policy meeting this week, or anytime soon for that matter. Earlier this year the bank was widely expected to pump more stimulus into the economy as it attempts to reach its ever-allusive 2% inflation target, but the market has pared back these expectations on the back of stronger than expected growth numbers for last quarter. At present, only 49% of economists surveyed by Bloomberg expect the bank to ease this year, as opposed to 61% only a month ago.

The Japanese economy grew an annualised 2.4% q/q in Q1 (0.6% q/q), beating an expected annualised growth rate of 1.6% q/q (0.4% q/q). This is a significant step-up from a 1.1% growth rate in Q4. Also, wage inflation appears to be heading higher as businesses become more confident about Japan’s economic outlook and a low yen is supporting exporters, and if this trend continues we may see the market scale back its expectations for additional easing even further.

However, the Japanese economy is definitely not out of the woods yet and it’s too soon to rule out additional easing. Core inflation is only 0.3%, which is a long way from the government’s target and there are only tentative signs of positive core price pressures. Retail sales are growing, but it’s still early days and soft import numbers highlight how weak domestic demand is.

Market reaction

It will be interesting to see if the BoJ upgrades its economic forecasts on the back of Q1’s stronger than expected GDP numbers. An even more optimistic tone from the bank may encourage a push towards the yen, especially after last week’s comments from Governor Kuroda which seem to suggest that the BoJ is mildly uncomfortable with recent weakness in the yen; he later stated that these comments weren’t indicative of a change in policy, but the level of the yen is clearly a factor in policy decisions and may become a hindrance to easing if JPY weakens even further. In saying that, a weak exchange rate for an export based economy like Japan is much more beneficial to growth than a strong one.

Overall, we are expecting the meeting to largely be a non-event for the yen as we expect the BoJ to maintain the status quo, but there’s a chance the bank will be even more optimistic this time around. The yen has been strengthening in Asia today as the market juggles the possibility of a more optimistic tone from the BoJ; a confirmation would likely see this yen strength continue, but if the market’s disappointed we could see a small pull-back in USDJPY.

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