On Thursday during the Asian trading session the Bank of Japan (BOJ) is expected to announce its monetary policy decision for the month of July.
For forex newbies out there, you should know that in 2013 the BOJ embarked on a huge, experimental program to buy “unlimited” assets in an effort to boost inflation to 2.0%.
Almost four years and bajillions worth of asset purchases later, Japan’s inflation is barely any faster than it was when the program started.
And with more and more analysts pointing out the risks of holding too many financial assets, the pressure to reduce the BOJ’s stimulus has increased.
Will Governor Kuroda and his team give in a little to the pressure this month? Market players are saying…nah. Here are three possible reasons why:
1. Low inflation prospects
One simple reason why the BOJ won’t lift the pedal from the metal is that the program still hasn’t achieved what it’s meant to do yet.
As I mentioned in my Japanese economy snapshot, employment prospects have improved but growth for real wages are still iffy. This is bad news for the economy which relies heavily on private consumption for growth.
More importantly, the current inflation rate is still worlds away from the BOJ’s 2.0% target. The annualized rate in May, for example, is only at 0.4% while the BOJ’s own figure is at 0.3%.
Can you guess the BOJ’s target for 2017? If you guessed 1.7%, then you can understand Kuroda’s headaches.
2. BOJ recently flexed its muscles
Another clue that points to the BOJ not doing anything new this month is that Kuroda and his team have recently proven their commitment to stimulate the economy.
Recall that the central bank switched gears in September 2016 when it announced that it would focus on keeping the yields of 10-year Japanese Government Bonds (JGBs) to “around zero percent” instead of gunning for a specific amount of asset purchases.
Well, as recently as less than two weeks ago BOJ members took another opportunity to walk the talk by buying “unlimited” amounts of 10-year JGBs at a yield of 0.110%. The move came after 10-year JGBs hit five-month highs following hawkish remarks from other major central bankers.
Even the top boss himself seems reluctant to stray from the plan. In his presser last month, Kuroda emphasized that “we can’t say yet that inflation expectations have completely turned positive,” adding that “We will debate an exit strategy only after 2% inflation is achieved and price growth stays there stably.”
3. BOJ’s board to become even more dovish?
This week’s meeting marks the last for board members Takehiro Sato and Takahide Kiuchi who will both end their terms on July 23.
BFD, since both members are not only critics of Kuroda’s monetary easing, but they have also regularly voted against the BOJ’s decision to implement negative interest rates and large-scale asset purchases. They will be replaced by economist Goshi Kataoka and banker Hitoshi Suzuki.
Kataoka co-wrote a book with board member Yutaka Harada on the role of printing money in boosting inflation expectations and is expected side with Kuroda and his dovish ways. Suzuki, meanwhile, is expected to side with the banking industries’ woes against negative interest rates.
With two potential doves making their first decision in September, it’s unlikely that the BOJ will embark on a new policy direction this week.
Does this mean that the BOJ’s decision will be a non-event this week? Not necessarily. See, with the BOJ widely expected to maintain its policies, focus will turn to the central bank’s growth and inflation outlook.
Market players are betting that the recent disappointment in inflation reports are enough for the BOJ to kick the can further down the road and push back its estimates on WHEN inflation can meet its 2.0% target.
The central bank’s last estimates aimed for FY 2018 but some analysts are thinking it would be pushed back as a “medium-to-long-term target.”