The BoJ surprised the market by stepping up its JGB purchases by JPY30 trillion per annum. The official reason is to counter the return of a deflation mind-set following the fall in crude oil prices. However, it is about the same amount that the GPIF will be selling in the coming months. Pure coincidence?
Today, the Bank of Japan surprised the financial markets by stepping up its quantitative and qualitative easing (QQE). The monetary base will be increased at an annual pace of about JPY 80 trillion (17% of GDP), JPY10-20 trillion higher than in the previous programme.
The BoJ will especially step up its purchases of JGBs by JPY 30 trillion to about JPY 80 trillion. Also purchases of Exchange Traded Funds and Japanese real estate investment trust will be increased so that their amount outstanding will rise at an annual pace of about JPY 3 trillion and about JPY 90 billion, respectively.
The decision was taken with only 5 out of the 9 Policy Board members voting in favour. This is rather exceptional, as decision taking is normally quite consensual.
The Bank argues that the deflationary mind-set that plagued the country for such a long-time could return because of weak demand following April’s VAT hike and the substantial decline in crude oil prices. The BoJ probably assumes that the expansion of QQE will weaken the currency and push up energy prices, which will be quickly translated into higher energy prices.
At the same time, the authorities concede that lower energy prices might have positive effect on economic activity in the mediumterm.
Today, the Government Pension Investment Fund (GPIF) announced that it will reduce the allocation for JGBs to 35% from 60%. The government had indeed pressed for an increase in risky assets given the low yields on JGBs. This would imply that the GPIF will offload in the coming months about JPY30 trillion worth of JGBs. This is about the same amount as the BoJ’s additional purchases. You could say that the BoJ is financing the GPIF’s transition to a more risky asset portfolio. Or was the timing pure coincidence?
Today, the Bank also changed its medium-term forecast. Inflationary pressures are slightly lower than in the previous forecast. For FY 2015, the inflation forecast ranges between 0.9% and 2%, excluding fresh food and the effect of the VAT hike.
In September, headline inflation was unchanged at 3.3%. Excluding food and the direct effect of April’s VAT hike, it edged down to 2.2%, mainly due to lower energy price inflation. Domestically generated inflation remains weak, despite the closing of the output gap. The problem is that wages have not been so responsive to labour market shortages. In August, contract wages were only 0.3% higher from a year earlier. Thanks to increased bonuses and overtime work, total earnings rose by 0.9%.
According to the Family Income and Expenditure Survey, real disposable income of workers’ households declined by almost 6% from a year earlier. Consumption rebounded in September thanks to bonus payments and the launch of Iphone6. Nevertheless, consumer spending remained well below last year’s level (-5.6% for all households).
We expect wage settlements to pick up gradually as the output gap disappears or even turns positive. This is partly related to the retirement of the post-war baby-boomers. In September, the unemployment rate inched up to 3.6% although remaining at a very low level. This is very close to the level of the NAIRU. In our scenario, inflation could reach the BoJ’s 2% inflation target in the course of 2016.
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