BANK OF JAPAN Governor Haruhiko Kuroda’s call in September for a review of how its mission to stimulate price growth could be threatened by the global slowdown spurred speculation that October would be the month for policy action.
With that meeting now a little over a week away, the ebbs and flows of the global economy and their impact on domestic data leaves him in an awkward predicament: Having stoked speculation of impending action, the need to ramp up stimulus still isn’t clear-cut.
Sure, the outlook for the global economy remains gloomy with the International Monetary Fund calling for more stimulus and forecasting the slowest growth this year since the financial crisis. Japan’s exports continue to fall, inflation keeps slowing and a sales tax hike is expected to shrink the economy this quarter.
But there’s been good news too: a truce in the trade war between the U.S. and China is the biggest development, while nascent signs of recovery in the tech sector also offer hope that some of the biggest risks for the world economy could be softening. Despite setbacks in parliament for Boris Johnson’s deal with the European Union, a no-deal Brexit also looks less likely.
The BOJ’s Tankan business survey at the beginning of October showed that the mood among Japan’s largest manufacturers is holding up better than expected, while the service sector remains buoyant.
Markets are also looking more sanguine, with Japanese stocks hovering around highs for the year, the yen away from a policy makers’ danger zone and yields on 10-year government debt within a loose trading band around zero.
“Kuroda can’t stay in his fighting pose for too long,” said Masamichi Adachi, chief economist at UBS Securities Japan and a former BOJ official, referring to the governor’s readiness to take action and the looming decision on Oct. 31. “Given the lack of really bad economic data and some signs of relief in financial markets, it’s a close call.”
Earlier expectations for more BOJ stimulus in October dovetailed with a global wave of interest rate cuts from Australia to South Korea that followed moves by the Federal Reserve and the European Central Bank. Kuroda also fanned expectations that the BOJ might lower rates by saying he was getting closer to adding stimulus and talking up the power of negative rates.
As recently as Oct. 11, overnight swaps indicated a 100% probability of a rate cut at the BOJ’s October meeting. Now those swaps are showing the bank is less likely to lower its short-term rate from -0.1%, pricing the likelihood of a cut at 56% on Wednesday.
The swaps data is volatile, but it suggests market perceptions have changed since the U.S. and China pulled back from the brink, despite Kuroda’s continued comments on the possibility of lowering rates.
Strip out falling energy costs and Japan’s prices are still edging up
What makes the BOJ reluctant to ease is the overwhelming scale of its easing program and its building side effects. If the economy looks like it can stave off a recession, the bank may prefer to hold off any major use of ammunition.
Japan already has a couple of decades of experience in the quantitative easing and other forms of unconventional monetary policy that central bankers in New Zealand, Australia and South Korea are only just starting to talk about.
If Kuroda holds off on lowering the negative rate despite calling for the review, one escape route would be to adjust the bank’s guidance on policy, perhaps linking the continuance of extremely low rates to risks to price momentum rather than the effects of the sales tax, as is currently the case.
That’s a possible outcome that meshes with the view of Kazuo Momma, former executive director in charge of monetary policy. He said he doesn’t expect any major policy change at the end of meeting on Oct. 30-31. What’s likely is an extension of forward guidance, the least costly tool to demonstrate the bank’s easing stance, he said.
Speculation about October stimulus earlier in the year centered on the possibility of the central bank acting in tandem with the government to support the economy through the sales tax. That’s the kind of action that would be welcomed by the IMF.
Those strong expectations of joint action cooled as Japan’s economy continued to expand and signs that the sales tax hit to the economy will likely be smaller than on previous occasions.
While the possibility of the government and BOJ acting together can’t be ruled out, Prime Minister Shinzo Abe’s administration now looks more likely to link any extra spending to disaster relief from Typhoon Hagibis. Compiling an extra budget to pay for major damage to bridges, building and roads could take about a month, making it difficult for the government to coordinate with the BOJ at the end of October. — Bloomberg
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