Japan: Scraping for More Stimulus

Published on October 26, 2015
SGH Insight
"While the Bank of Japan is indeed certain to lower its growth and inflation projections at this week’s Monetary Policy Committee meeting, the downward revisions will not be accompanied this year as they were last year by a surprise Halloween easing, namely there will be no expansion in the BOJ’s 80 trillion yen monetary base growth target...

...The good news is that Abe has started to turn his focus back to stimulus measures other than monetary policy. In addition to the possibility of a modest two or three trillion yen supplemental budget stimulus, Administration leaks suggest those, more interestingly, may also include a plan to accelerate the speed of promised cuts in the corporate tax rate."
Market Validation
(Bloomberg 10/30/15) "The yen rose, cementing its status as this week’s best-performing Group-of-10 currency, after the Bank of Japan refrained from adding to monetary stimulus and pushed back the time-frame for reaching its inflation target. The yen advanced 0.6 percent to 120.36 per dollar as of 7:20 a.m. New York time, on track for a 0.9 percent gain this week, its biggest since early September...

Japanese stocks rose, with the Topix index
capping its best monthly gain in more than two years, as
investors looked past a Bank of Japan decision to refrain from
adding to monetary easing and focused on earnings and a report
that the government is considering extra fiscal stimulus."

Despite continued soft data, Bank of Japan Governor Haruhiko Kuroda has repeatedly stuck to the mantra that Japan’s economy is on track – broadly speaking – to hit his stated 2% inflation target, even if the date to hit it keeps slipping.

 

Those assurances notwithstanding, however, around half of surveyed analysts still expect Kuroda to announce further easing measures at the upcoming BOJ meeting this Friday, especially in light of the release of semi-annual economic projections that are sure to be revised downward, yet again.

 

*** While the Bank of Japan is indeed certain to lower its growth and inflation projections at this week’s Monetary Policy Committee meeting, the downward revisions will not be accompanied this year as they were last year by a surprise Halloween easing, namely there will be no expansion in the BOJ’s 80 trillion yen monetary base growth target. ***

 

*** The BOJ will have to step up monthly purchases to keep the 80 trillion yen pace of that expansion as planned as it reinvests proceeds from its ballooning balance sheet into the market. But on track to already own almost half the outstanding JGB market by 2017, we detect no impetus for any further QQE expansion from the BOJ at least until next year, if at all, as officials monitor wage rounds for signs corporations are finally passing rising production costs into higher worker compensation that would boost disposable income, as well as looking for higher inflationary impulses, once the drag of low energy prices is stripped out, that would be evidence the “broad recovery” remains on the right path. ***

 

*** Furthermore, there is little to no pressure from the Government of Prime Minister Shinzo Abe, also worried about the pace of wage growth keeping up with inflation, on the BOJ to ease. Nagatacho is turning its eyes instead to the potential for a round of stimulus on the fiscal side, through modest tweaks to the budget, but more intriguingly, with a renewed focus on front-loading and possibly even deepening planned corporate tax cuts. ***

 

Shifting Yardsticks

 

Expectations for a cut at this week’s meeting, we believe, are in no small part fueled by memories of Kuroda’s Halloween surprise easing almost exactly one year ago on October 31 that propelled the dollar/yen exchange rate through the 110 level on its way to 120.

 

And to be fair, analysts clamoring for further easing by the BOJ point to core CPI that is flat compared to the last year’s levels. Indeed even the BOJ itself seems to be gradually losing its confidence on the pace of recovery in the economy and the possibility of “healthy” inflation.

 

Further adding to easing expectations on October 30th the BOJ will issue its revised semi-annual economic outlook. It is expected to sharply lower the growth forecast for this year from 1.7% to perhaps closer to 1%, and perhaps nudge the inflation forecast for next year down from 1.9% by a couple of tenths of a percent.

 

There is little question, in other words, that the Japanese economic recovery is sluggish and inflation low.

 

But this is not 2014, and BOJ officials are questioning how much of the weak inflation numbers are a result of continued weakness in aggregate demand, and how much is still due to the first or second round effects of low energy prices.

 

Furthermore, in observing the deterioration in consumer sentiment, many economists actually point to one cause as being the rising prices of some necessity items, like processed foods.

 

So as we first flagged in SGH 7/23/15, “Japan: Changing the CPI Baskets,” the BOJ has started to shift its emphasis from headline and even core CPI to a new CPI measure (CPI excluding perishable foods and energy but including processed foods) and, if the pace of improvement in the new CPI continues to remain stable, the BOJ will not offer further easing measures.

 

And to date other non-official measures of price indices, such as those based on mass-retail big data like the University Tokyo Daily Price Index, and the Hitotsubashi University CPI, show better pictures of inflation than the official CPI.

 

No Pressure to Ease

 

Of course there can be no discussion of BOJ policy without a discussion of the level, direction, and politics of easing and the Yen.

 

The weakening yen has clearly benefited the largest Japanese corporations, but small businesses selling their products in domestic markets and importing energy and raw materials from overseas have increasingly expressed concerns over a possible further rise in import prices with any further depreciation of the yen.

 

With these small corporations constituting a traditional base of support of the ruling Liberal Democratic Party, it should come as no surprise Prime Minister Abe and Finance Minister Taro Aso are not applying any pressure on the BOJ to ease.

 

Indeed lower inflation due to cheap energy is still seen to be good for private consumption and corporate profits, while a cheaper yen through more liquidity may not even be all that welcome at all.

 

There is likewise no pressure either from within the BOJ or Japanese investment community on Kuroda to ease.

 

Governor Kikuo Iwata, for example — who at one point was an aggressive proponent for monetary easing — has this time been quiet based on the diminishing impact of the last easing cycle on the economic recovery, on exports (especially in volume terms), and on inflation.

 

And while Japanese stock prices are volatile along with global markets, domestic investors seem to regard the turbulence as mainly due to overseas factors such as worries over the Chinese economy or monetary policy in the United States. As a consequence, there has been no outcry or pressure on BOJ monetary policy.

 

Turning to Taxes

 

The good news is that Abe has started to turn his focus back to stimulus measures other than monetary policy. In addition to the possibility of a modest two or three trillion yen supplemental budget stimulus, Administration leaks suggest those, more interestingly, may also include a plan to accelerate the speed of promised cuts in the corporate tax rate.

 

The Abe Administration had originally planned to drop the tax rate to less than 30% “some years later,” but indications are they may now seek to hit that target by 2017.

 

Abe also recently concluded a meeting with business organizations with hints that stimulating capital expenditure (and hopefully with it, wages) are also being explored. And while at present there appear to be no concrete plans to stimulate CAPEX, it is increasingly likely the Abe Administration will look for ways to offer tax shields that could lead to the same result.

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