Japan: A Likely End to BOJ Eases

Published on April 14, 2015
SGH Insight
"That means the BOJ will be frozen on monetary policy, and continue to let the economy ride as is, certainly without offering any additional near term monetary easing."

SGH Fed: Here Again April 27, 2015

"The Committee will acknowledge the slower first quarter growth, but within the same breath that it is likely to prove transitory. That translates into expectations of unemployment falling steadily through the year and low inflation persisting but still picking up next year "
Market Validation
(WSJ 4/15/15) "Bank of Japan Governor Haruhiko Kuroda said that the country’s underlying inflation trend is steadily improving, that inflation expectations are rising and that corporate wage- and price-setting behavior is changing."

(Bloomberg 4/15/15) "Yen drops 0.2% to 119.58 per dollar, set to snap three days of gains"

(Bloomberg 4/30/15) "Asian stocks dropped the most since January after the Bank of Japan refrained from boosting stimulus and as the Federal Reserve downplayed weak U.S. economic growth and kept raising interest rates on the table for later this year."

At last week’s Bank of Japan rate setting meeting the Monetary Policy Committee decided to keep its bond buying and monetary expansion targets unchanged, as almost universally expected. Board Member Takahide Kiuchi did dissent at the meeting, proposing to shrink the pace of supplying money to markets – but then again Kiuchi has consistently voted against the mainstream since October of last year, when Governor Haruhiko Kuroda pushed his colleagues into reluctantly agreeing to a surprise additional dollop of “Qualitative and Quantitative Easing” (QQE).

But even as the BOJ remains on hold, and with a tightening dissent to boot, the guessing game among street economists over the BOJ’s next ease continues, with expectations for the next cut mostly centered safely at a distance for around fall of this year. And with inflation falling well short of the BOJ’s 2% target, some economists even assert the BOJ should and will accelerate the pace of purchasing JGBs at its next policy meeting on April 30. That is because even though it will be a one-day meeting, it is an important one, as the BOJ will at that meeting be issuing its Outlook Report where it may well be forced to lower its forecast for inflation, making it clear it will be almost impossible to hit its 2% inflation goal “around” this fiscal year.

*** But from what we understand, BOJ officials will continue to attribute the recent low inflation readings almost entirely to low energy prices, which so long as they do not temper inflation expectations and more importantly business and consumer behavior, will be temporary, and will indeed stimulate domestic demand. ***

*** And that means the BOJ will be frozen on monetary policy, and continue to let the economy ride as is, certainly without offering any additional near term monetary easing. That also means despite continued market hopes and expectations for some sort of additional easing at some point even later in the year, if the BOJ forecasts pan out, that may also never come or ever be deemed necessary. ***

And there is evidence to support BOJ assertions that inflation expectations and consumer sentiment have been holding up and may continue to remain firm.

Japanese retailers have finally started to observe a recovery in consumption. The y-o-y % change in department store and supermarket sales recorded positive figures in February (adjusted by outlet numbers), and that was the first increase since the consumption tax hike. With news of “base ups” reported, forecasters suspect some improvement in consumer sentiment will follow.

As to the yen and corporate Japan, considering recent economic data, the BOJ Tankan Survey released on April 1st did show some caution among corporate management, namely plans to actually shrink capital expenditure by 5.0% in fiscal year 2015 (in all sizes and all industries), and expectations of only a 0.6% increase in current profits, where markets expect 10 – 15% profit increases for companies listed on the Tokyo Stock Exchange’s First Section.

This Tankan data – released on April Fool’s Day – pushed stock prices down for the day, but even here officials note that Japanese corporations do always tend to be cautious, and historically overly cautious, in the survey.

To that point, the corporations assumed an average dollar/yen exchange rate of 111.81 in the survey, a level not seen since Kuroda’s October 31, 2014 ease (see SGH 10/31/14, “Japan: QQE, Yen, and the Looming Sales Tax Decision,” “We would not be surprised if the USD/Yen rate over time was to settle from the recent 105-110 into a new 110-120 range”).

So it may be reasonable to expect more profits will be earned, among exporters in the first section at least, than generally forecast in the survey. That assumes of course a long awaited US economic recovery and normalization by the Federal Reserve will help keep the dollar from dropping to the lower end of that 110-120 yen band – at least not all at once, or all too soon.

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