Japan: BOJ Easing Speculation

Published on October 24, 2019

Bank of Japan Governor Haruhiko Kuroda raised expectations last month for a new round of easing at the upcoming Monetary Policy Meeting on October 30 and 31 in vowing that the central bank would “certainly” cut rates if needed, and then noting that global conditions have, if anything, deteriorated further.

The BOJ also fueled some easing speculation in its monetary policy statement after the September MPM meeting, where it promised to “re-examine economic and price developments at the next MPM, when [the bank] updates the outlook for economic activity and prices.”

*** It is clear that Governor Kuroda and many BOJ officials are increasingly uneasy about the impact of continued trade, manufacturing, and geopolitical uncertainties on the global and domestic Japanese economies, but we do not expect that to translate into a deeper cut in interest rates at the upcoming MPM meeting on October 31. ***

*** Rather, if there is any movement on monetary policy at this meeting, it is likely, we believe, to be of a more modest nature, namely a possible increase in the BOJ schedule of purchases of Japanese Government Bonds. That would presumably be focused more on the short-to intermediate-end of the curve, as the BOJ has been seeking to balance its purchases in a way that maintains a positive sloping yield curve for the benefit of its domestic financial institutions. ***

The Japanese government has already revised downward its official economic outlook, and the BOJ is likely to follow suit and revise its already low inflation forecasts down as well when it releases its official “Outlook for Economic Activity and Prices” concurrently with the Monetary Policy Meeting at the end of this month.

But in assessing the strength of the economy, it is too soon yet to accurately measure the impact of the consumption tax rate hike that was enacted in the beginning of October on domestic spending.

Furthermore, there is no sense of imminent crisis from the financial markets, where equities have been stable to strong, and the all-important dollar-yen rate has for all effective purpose been aimlessly chopping around the 108 level now for months.

That, of course, could all change over time. But as things stand, there does not appear to be a strong sense among BOJ officials of a need to rush into aggressive action beyond, perhaps, a potential modest tweak in JGB purchases.

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