Bank of Japan board probably still divided despite 8-1 vote

As expected, Bank of Japan (BoJ) was on hold in connection with its meeting this morning, meaning that the target for the annual expansion of the monetary base remains JPY80trn.

Despite Japan entering a technical recession in Q3 there was no changes in BoJ’s view on the economy. It still sees the ‘economy recovering as a trend’ and it also expects the economy to continue to ‘recover moderately’. Data like retail sales and domestic machinery orders suggest that the Japanese economy started to recover in Q3 but it is still a bumpy road for, in particular, industrial production. The statement was softer on inflation noting that ‘if the current downward pressure on prices remains, there is a risk that the conversion of a deflationary mindset might be delayed’. However, the statement also said that BoJ had pre-empted this risk by easing at its previous meeting.

The main focus this morning was on the voting pattern in the statement. The guidelines for monetary policy were approved by an 8-1 majority. When BoJ announced aggressive easing at its previous meeting the statement was only approved with a slim 5-4 majority. In our view it would be wrong to conclude that board members have changed their views since the last meeting. The voting largely reflects an acceptance that a decision on the monetary stance has been taken and rolling back the stimulus announced at the previous meeting is not an option. However, the BoJ board probably remains divided.

Board member Kuichi was again the sole dissenter. Kuichi continues to argue that the deadline for reaching the 2% inflation target should be more flexible. The current deadline is ‘the latter part of fiscal 2015’. Kuichi also proposed that monetary guidelines should be as before the previous monetary meaning, implying that the stimulus measures should be rolled back.

At the press briefing BoJ governor Kuroda sounded slightly hawkish and a bit critical about the government’s decision to postpone the consumption tax hike in 2015 to 2017. Importantly, Kuroda referred to the 2013 joint statement from the government and BoJ and underscored that the government’s and BoJ’s roles were clear in this joint statement. The 2013 joint statement could be regarded as an attempt to coordinate fiscal and monetary policy and consequently, Kuroda’s reference could be interpreted as a suggestion that the government is not keeping its part of an ‘implicit’ agreement.

We expect BoJ to be on hold in 2015. First, we think there is still considerable disagreement on the BoJ board and it will be difficult to get a majority for additional easing. Second, the government’s postponement of the consumption tax hike has also reduced BoJ’s manoeuvring room. With no fiscal headwinds and the support from a substantial weaker yen, the outlook for growth in 2016 is quite strong. Hence, it looks like BoJ will have to start tapering at some stage in 2016. It should be remembered that even without additional easing BoJ's balance sheet will be expanded aggressively in 2015.

We continue to see a weaker yen in 2015 on the back of a monetary policy that remains very accommodative, even without additional easing. For our view on the JPY, see FX Forecast Update, 18 November 2014.

Statement from today's BOJ meeting.