The BOJ’s latest policy statement might not be as explosive as last month, but investors still found a couple of points worth noting.
1. No changes to policy and growth, and inflation forecasts
As expected, the BOJ members stuck to the pace of adding 60 to 70 trillion JPY a year to Japan’s monetary base and kept its interest rates at record lows.
BOJ head Haruhiko Kuroda explained that they believe that the downside risks to global growth haven’t increased and that a positive economic cycle involving production, income, and spending is in place. In fact, Kuroda and his team are so optimistic over the domestic demand-led growth that they expect the economy to exceed its 0.5% growth potential despite the possible drag of the sales-tax hike.
Other things to note are the BOJ’s views on capital expenditure (“recovery is becoming clearer”) and industrial production (“its pace of gains is increasing somewhat”).
The BOJ also isn’t worried about inflation, as they see the inflation on track to reach its 2% target by late 2014 or early 2015. However, Kuroda also warned that they will adjust their monetary policy “without hesitation” if the inflation rate starts to falter.
2. Temporary factors are dragging exports
With the yen falling significantly over the past few months you would think that we’ll see some improvement in Japan’s trade numbers. So what’s up with Japan’s record trade deficit?
Well, the BOJ believes that its exports is being dragged down by temporary factors such as the snow storms in the U.S., the Chinese New Year, and the Japanese carmakers’ limited ability to cater to overseas demand when domestic demand is up ahead of Japan’s sales tax hike. The central bank estimates that exports will pick up in the coming months when the emerging economies gain momentum.
The yen weakened by all of 20-30 pips at the release of the BOJ’s statements but the yen crosses soon traded back to their tight intraday ranges. Some analysts believe that the lack of reaction is due to speculations that the BOJ is simply tempering stimulus expectations ahead of the sales-tax hike. Other blogs like zerohedge.com expressed their disappointment over the BOJ’s “contempt for the truth.”
Whether or not the BOJ is really optimistic or is just preparing for slippery times ahead, we should do our part and be vigilant on what the BOJ is also watching. We know that the BOJ is watching inflation, capital expenditure, consumption and the economic growth of its major trading partners. Any downside risks to these factors could change the BOJ’s tune in the next couple of weeks.
How about you? Do you believe that the BOJ has reason to be optimistic or is it trying to steer our sentiment ahead of the sales-tax hike in April? Feel free to give your two cents on the poll below!