If you’ve been following the BOJ rate decisions closely, you’d know that the Japanese central bank already eased monetary policy thrice this year. Will we see their fourth set of stimulus on October 30? Here are four reasons why the BOJ might ease again:
1. Pressure from the Japanese government?
Earlier this month, the Japanese government cut their growth and inflation forecasts for the third straight month. What’s particularly concerning about this recent downgrade-fest is that it’s the second longest streak, next to the five-month set of downgrades back when the global financial crisis started in 2008.
A local newspaper even reported that the Japanese government is urging the BOJ to expand their ongoing asset purchase program by 20 trillion JPY to a total of 100 trillion JPY. Although Japan’s Finance Minister Koriki Jojima denied these speculations later on, he did mention that he would like to see further easing by the BOJ.
2. Weak external demand
During their previous monetary policy meeting, the BOJ already noted that economic growth was faltering and that the recovery probably won’t start until next year at the earliest. A few weeks later, Japan had a territorial dispute with China, which led to boycotts of Japanese products in one of the world’s largest economies.
It doesn’t help that factory output and capital spending are already being weighed down by the ongoing fiscal crisis in the euro zone and the general downturn in global economic activity. Even adding insult to injury is the yen’s persistent strength, which hurts demand for Japanese exports as it makes them relatively more expensive in the international markets.
3. Downturn in domestic spending
Based on latest consumer spending reports, it appears that the Japanese citizens themselves aren’t willing to spend. Components of Japan’s retail sales data revealed that supermarket sales plummeted at its fastest pace in months and that this was accompanied by a decline in nationwide department store sales.
With that, it’s no surprise that business sentiment worsened in Q3 2012 and even dipped to its 15-month low this October. As Pip Diddy often mentions in his economic roundup, lower business confidence typically leads to weaker production and investment down the line.
4. Poor inflation outlook
Another factor that’s currently troubling the BOJ is the fact that Japan will most likely miss its 1% inflation target for the next few years. There’s no denying that Japan has been battling deflation ever since N’Sync was in town and it appears that the central bank will have to admit that it will still take a long while before they can sing “Bye Bye Bye” to negative inflation rates.
Of course this could lead to even more pressure from Japanese lawmakers who have spent almost an entire decade calling for more aggressive actions to bring Japan out of the deflationary spiral.
Market watchers are expecting the BOJ to expand their current 80 trillion JPY asset buying and loan program by anywhere from 5 to 20 trillion JPY. One option for the BOJ is to allot a chunk of the increase for purchases of government bonds. Another option for them is to boost their purchases of exchange-traded funds or real-estate investment trust funds as they did in the past.
Then again, there’s always the chance that the BOJ could just sit on its hands and say that they’ll wait for more economic figures to help them decide whether further easing is necessary or not. After all, they did dole out additional stimulus three times this year.
If you’re planning on trading this event, make sure you set those stops right and remember that anything can happen!