Yen moves and political considerations could be decisive factors for Bank of Japan policymakers agonizing over whether to expand stimulus yet again on Friday or to save their dwindling policy resources in case the economy takes a turn for the worse.
Many central bank policymakers prefer to hold off on action as they expect an anticipated fiscal stimulus package and a delay in next year’s sales tax hike to boost growth and brighten the prospects for hitting their 2 percent inflation target.
The BOJ will use the fiscal boost to minimize any reduction in next fiscal year’s inflation forecast, which would allow it to argue that there is no need for immediate easing.
“As long as inflation is heading toward 2 percent as a trend, a minor delay in hitting the target won’t immediately lead to easing,” said a source familiar with the BOJ’s thinking.
But various factors may work to tilt the nine-member board’s debate in favor of expanding stimulus, making the decision too close to call, sources say.
There is near-consensus in the market that the BOJ will sharply cut its inflation forecasts, delay the timeframe for hitting its price goal and ease policy further.
By failing to meet hyped-up market expectations of radical BOJ action, the central bank risks triggering an unwelcome yen spike that could knock down Tokyo stock prices.
“Currency moves are a key part of the equation,” another source said, adding the BOJ may ease if it feels that failing to act could trigger another yen spike above 100 to the dollar.
The dollar briefly shed 1.7 percent to slide below 104 yen on Tuesday as cautious investors began scaling back expectations of big stimulus steps. It stood around 104.70 yen on Wednesday.
The government may also pressure the BOJ to ease now to time it with an announcement of a fiscal stimulus package early next week, which would maximize the psychological impact on markets.
Finance Minister Taro Aso on Tuesday said he hoped that the BOJ “does its utmost” to hit its inflation target.
MULLING OPTIONS
BOJ Governor Haruhiko Kuroda has ruled out the chance of adopting “helicopter money,” or direct underwriting of public debt. But he said there was “nothing wrong” in coordinating fiscal and monetary action to boost the effect on growth.
If the BOJ were to ease, it is likely to buy more government bonds, exchange-traded funds (ETF) and other risky assets, the sources say.
Cutting interest rates into negative territory has proved unpopular with the public and the government, so deepening the cuts is a less likely option, they say.
The BOJ is internally considering several options for easing as support for action grows within the bank, though some board members are likely to dissent to any proposal for monetary expansion, the Nikkei reported on Wednesday.
Kuroda has stressed the BOJ still has ample means left available to expand stimulus. But several board members have openly expressed doubts over the benefits of expanding stimulus, with nearly three years of aggressive money printing having failed to push up prices.
The BOJ is conducting an internal examination of the effects of negative rates, the sources said, underscoring a growing concern within the bank about the rising cost of its policies.
Regardless of Friday’s move, the BOJ is caught in a bind, said Izuru Kato, chief economist at Totan Research.
“Even if the BOJ eases this time, markets will keep asking for more,” he said. “That’s bad strategy for a central bank left with very few policy tools.”
Source: Reuters
