Central Bank Matchup: The BOJ vs. The RBA

If you missed ’em, the BOJ and the RBA announced their respective monetary policy statements yesterday. So, what did the two central banks have to say? Well, time to find out!


The BOJ

Monetary Policy Maintained

In a 7-2 majority vote, the BOJ decided to maintain its current monetary policy, with the short-term policy rate at -0.1% and the annual pace of Japanese government bonds (JGBs) purchases at ¥80 trillion in order to keep JGB yields at around 0%.

The BOJ also decided with a 7-2 majority vote to purchase ¥6 trillion worth of exchange-traded funds (ETFs) and ¥90 billion worth of Japan real estate investment trusts (J-REITs) per year. The BOJ also voted to maintain its holdings of commercial paper and corporate bonds respectively at ¥2.2 trillion and ¥3.2 trillion.

GDP Projections Unchanged, CPI Forecasts Downgraded

Other than the decision to keep its powder dry, the BOJ also released its quarterly outlook report. In the aforementioned report, the BOJ optimistically noted that “Japan’s economy has continued its moderate recovery trend,” adding that “Japan’s economy is likely to continue growing at a pace above its potential through the projection period,” which is until the end of 2018.

However, the BOJ also pointed out that “exports and production have been sluggish due mainly to the effects of the slowdown in emerging economies.” Moreover, the BOJ readily admitted that “Inflation expectations have remained in a weakening phase.”

Given the above, the BOJ maintained its projections for GDP growth while downgrading its forecasts for inflation, as you can see on the table below.

No Easing Despite CPI Downgrades

During the presser that later followed, BOJ Shogun Kuroda was asked about the lack of easing, even though the BOJ downgraded its CPI projections, effectively pushing back the projected timing for hitting the BOJ’s 2.0% inflation target. Well, Kuroda had this to say:

“We didn’t take additional monetary easing action despite delaying the projected timing for hitting our (inflation) target. But in the past, we didn’t necessarily ease each time we pushed back the timeframe. There were times we eased even though we didn’t push back the timeframe. The two don’t necessarily directly link. We adjust policy with the sole purpose of maintaining the momentum for achieving 2 percent inflation, with an eye on economic and price developments.”

Risks to Economic Growth

As for risks to Japan’s economic outlook, the BOJ said that “risks are skewed to the downside, particularly those regarding developments in overseas economies.” To be more specific, the BOJ listed the following external risks.

  • developments in emerging and commodity-exporting economies, particularly China
  • developments in the U.S. economy and the impact of its monetary policy on global financial markets
  • the consequences stemming from the United Kingdom’s vote to leave the European Union (EU) and their effects
  • prospects regarding the European debt problem, including the financial sector
  • other geopolitical risks

Risks to Inflation

Risks to inflation, meanwhile, are also skewed to the downside and come mainly from the “weakening phase” in inflation expectations, as already mentioned earlier. If inflation expectations remain weak or weaken further, then “there is a risk that firms’ price- and wage-setting stance will remain cautious.”

Other than that, the BOJ also pointed to other components of CPI that don’t respond to the output gap (aggregate supply and demand balance). And the BOJ specifically mentioned that fall in housing rent, which “has accelerated recently, possibly constraining CPI inflation by more than projected.”

Summary

  • 7-2 majority vote to maintain current monetary policy
  • Short-term policy rate at -0.1%
  • JGB purchases at ¥80 trillion per year
  • JGB yield target steady at 0.0%
  • ETF purchases at ¥6 trillion per year
  • J-REIT purchases at ¥90 billion per year
  • Commercial paper and corporate bonds held maintained respectively at ¥2.2 trillion and ¥3.2 trillion
  • GDP projection unchanged
  • CPI projections downgraded
  • BOJ no longer expects to hit 2.0% inflation target by 2018
  • No plans for easing yet, despite downgraded CPI forecasts
  • The major risks to Japan’s economic growth come primarily from overseas, namely China
  • The main risk to inflation outlook comes mainly from the “weakening phase” in inflation expectations

Overall, there wasn’t really anything major, other than the fact that the BOJ pushed back the timeline for achieving its 2.0% inflation target, which is why the yen barely reacted. And despite the downgraded inflation projections, the BOJ refrained from easing further and even tried to play it off, which likely dampened expectations that the BOJ would be easing further soon. And this, in turn, probably opened the way for yen bulls to start loading up on the safe-haven yen when risk sentiment turned rather sour during yesterday’s European and U.S. sessions.

USD/JPY: 15-Minute Forex Chart

USD/JPY: 15-Minute Forex Chart


The RBA

Monetary Policy Maintained

Like the BOJ, the RBA also decided to keep its powder dry by keeping the cash rate at 1.50%, reasoning that “holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.” This is the same line they used during the previous RBA statement back in October.

Economic Assessment Unchanged

With regard to its assessment of the Australian economy, the RBA’s views remain almost exactly the same as in the previous RBA statement. To be more specific, “the economy is growing at a moderate rate,” as the “large decline in mining investment is being offset by growth in other areas, including residential construction, public demand and exports.”

With regard to the labor market, “indicators continue to be somewhat mixed,” since the jobless rate “has declined this year, although there is considerable variation in employment growth across the country.” Moreover, “Part-time employment has been growing strongly, but employment growth overall has slowed.”

As for inflation, it “remains quite low.” And inflation is expected to “remain low for some time,” because of “Subdued growth in labour costs and very low cost pressures elsewhere in the world.”

Economic Outlook Unchanged

As for its economic outlook, the RBA said that its “forecasts for output growth and inflation are little changed from those of three months ago,” so the projections in the table below still hold true.

On the Housing Market

Regarding the housing market, the threat of a housing bubble seems to continue to abate because “Turnover in the housing market and growth in lending for housing have slowed over the past year,” thanks to “supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments.”

The RBA also noted that “The rate of increase in housing prices is also lower than it was a year ago, although prices in some markets have been rising briskly over the past few months.”

The abating threat of a housing bubble may give the RBA enough wiggle room to cut further, but the RBA doesn’t seem to be in a hurry to do that yet.

Summary

  • RBA decides to maintain current monetary policy
  • Cash rate held steady at 1.50%
  • Overall economic assessment unchanged
  • Australia’s economy continues to grow at a “moderate rate”
  • Inflation is still low and expected to remain low
  • Overall economic outlook unchanged since 3 months ago
  • Threats of a housing bubble seems to be abating

Overall, the RBA remained optimistic on economic growth while accepting that inflation will likely remain low. Moreover, the RBA reasoned that the current monetary policy is just right and doesn’t seem to be in a hurry to cut rates further, even though the threat of a housing bubble appears to continue to abate, which is likely why the Aussie got bought up shortly after the RBA released its official statement. The RBA statement didn’t have a lot of sticking power, though, since the higher-yielding Aussie later got dumped when risk aversion persisted into yesterday’s U.S. session.

AUD/USD: 15-Minute Forex Chart

AUD/USD: 15-Minute Forex Chart

So, both central banks decided to stay the course (for now at least), with the BOJ decision ending up being a non-event while the RBA statement gave the Aussie a quick, bullish boost, but little follow-through buying after that. But do you think that one or maybe both central banks still need to ease further? Share your thoughts by voting in the poll below!

 


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