BOJ: Another June Pause

Published on June 13, 2016

Governor Haruhiko Kuroda and the Bank of Japan Policy Board will meet this week, on June 15 and 16, to assess the country’s economic condition and monetary policy stance.

 
*** Despite the most renewed bout of tightening of financial conditions, namely the strengthening of the yen and weakening of equity markets, we continue to expect no move at this Monetary Policy Meeting.***

 
*** We do expect the BOJ to communicate it stands prepared to act, and still believe it could ease at its next meeting on July 28-29 (see SGH 5/31/16, “Japan: BOJ and Fiscal Stimulus Plans”). ***

Three Reasons to Hold

 
The reasons the BOJ will hold its fire this week, in brief, are threefold:

 
First, BOJ officials, like their colleagues in the Federal Reserve this week, will want to wait for the results of the UK Brexit referendum on June 23, or more accurately for the market reaction after the vote, before expending any more of their increasingly scarce ammunition.

 
Second, and most importantly, since the last BOJ meeting on April 27 – 28 when the bank remained on hold, there has been no substantial deterioration in the Japanese economy.

 
While there has been a good degree of volatility in markets, most of that weakness is fairly fresh, occurring over the last two weeks in the month of June, and so too soon and not severe or sustained enough yet to drive an easing decision at this week’s meeting. Furthermore, those moves have been largely in response to global factors, including US data points and Fed policy as well as Brexit jitters, and not in response to domestic Japanese economic conditions.

 
Finally, Prime Minister Shinzo Abe has at long last declared a postponement of the planned hike in the consumption tax from 8% to 10%, and his ruling Liberal Democratic Party has also laid out an election promise of economic stimulus measures to be announced in the coming autumn.

 
Those fiscal measures are not intended to replace or preclude additional monetary policy stimulus, but rather to enhance it, and the BOJ will ease further as needed. But Kuroda and his colleagues will also want to see details and assess some of the impact of these fiscal policy announcements and measures before taking further action at this point in time.

 
There is an outside risk the BOJ may choose to act in June against our expectations if there is enormous additional turbulence in markets that would, for example, drive the Nikkei index under 15,000 (similar to its levels in February), and dollar/yen under 105 (worse than the levels from the beginning of May) over the next few days.

 
But we do not expect the markets to force the BOJ hand at this week’s meeting, not yet.

 

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