Investors betting the Bank of Japan will ease monetary policy next week could be riding for a fall, as the yen’s recent weakening and a government spending package take some pressure off the bank to step up its massive stimulus program.
Market speculation of further easing spiked last week after visiting former Federal Reserve Chairman Ben Bernanke told Prime Minister Shinzo Abe that there were still “various tools available” for monetary policy to spur growth.
A Reuters poll showed 85 percent of analysts expect the BOJ to ease on July 29, alongside the fiscal spending boost Abe is set to announce this month.
The BOJ has already implemented negative interest rates and is printing 80 trillion yen ($750 billion) a year to stimulate inflation after decades of deflation and stagnant growth, yet inflationary expectations appear to be weakening.
Sources familiar with the BOJ say it will downgrade its assessment that underlying trend inflation is “improving steadily” next week.
But there is no consensus within the bank on whether that warrants prompt action.
While officials do not rule out more stimulus in July, some say a delay in hitting the bank’s inflation target alone shouldn’t trigger immediate easing as a tightening job market will eventually push up wages and feed into prices.
“It’s true underlying trend inflation lacks momentum. But what’s important is for there to be signs that inflation expectations will heighten in the future,” said one of the sources.
MARKET BACKLASH
The BOJ has stood pat since it adopted negative interest rates in January, with Governor Haruhiko Kuroda blaming weak inflation on temporary factors like oil price falls.
But sliding import costs from a strong yen and weak consumption have led many analysts to predict the BOJ will sharply cut its price forecasts, push back the two-year timeframe for hitting its price target and ease more.
September 10-year government bond futures 2JGBv1 rose to a record high and the iShares MSCI Japan ETF index (EWJ.P) hit a five-week high this month on expectations of a July easing.
“If the BOJ postpones the deadline again, it would exceed Kuroda’s term (as governor in April 2018). Many people think that doing nothing under such conditions would be unacceptable,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance in Tokyo.
Some also think Kuroda will ease this month in step with Abe’s pledged spending plan, but given calls by Group of 20 nations for members to avoid relying excessively on monetary policy to spur growth, the BOJ might sit this dance out.
Indeed sources have told Reuters the bank will factor in the government’s spending package in producing new projections this month, which could help minimize cuts to its inflation forecasts and reduce the pressure for easing.
Kuroda may also see less need to act, now shares have risen and the yen has eased to 106 per dollar since spiking below 100 when Britain’s vote to leave the European Union unsettled global markets last month.
But the bank risks triggering a market backlash if it fails to meet investors’ expectations for easing.
“In the case of a ‘do-nothing’ surprise, you have to look at the technicals of dollar/yen. We could see a pretty sharp move lower,” said Mitul Kotecha, head of FX strategy at Asia-Pacific for Barclays in Singapore.
“We were around 100 (yen to the dollar) not too long ago, earlier in the month, and I think anything towards that level wouldn’t be surprising, if we see no action.”
A Citi survey of its clients and financial institutions showed 80 percent expected the dollar to fall more than 3 percent against the yen if the BOJ stands pat and does not signal action in September. More than 30 percent think the drop will be more than 4 percent.
But that might not be enough to persuade BOJ officials.
“The BOJ won’t ease just because markets have factored in action,” said one of the sources. “That’s not monetary policy.”
Source: Reuters
