Bank of Japan on autopilot at least until autumn

Bank of Japan (BoJ) as widely expected did not announce any new easing measures in connection with today’s monetary meeting. The target for the annual expansion of the monetary base (the main policy instrument) was maintained at JPY80trn.

The policy proposal was approved with the usual 8-1 majority with Kuichi as usual the sole dissenter. Kuichi continues to propose that the size of the QE-programme should be cut substantially by reducing the target for the annual expansion of the monetary base to just JPY45trn. While Kuichi is a lone wolf on the BoJ board, it would be wrong to conclude that there is a strong consensus behind the current policy. The expansion of the QE programme in October last year was only approved with a slim 5-4 majority. Hence, the bar for further easing is probably quite high.

The statement from the meeting was virtually unchanged compared with the previous two meetings and hence BoJ does not signal any imminent easing measures. BoJ still expects the economy to recover moderately and that inflation (excluding the consumption tax hike) will be about 0% y/y in the short run. BoJ expects to reach its 2% inflation target at some stage in 2016 (first half of fiscal year 2016 starting in April 2016). At the press briefing BoJ governor Kuroda on balance was a bit more bullish than the statement from the meeting. Among other things Kuroda said that BoJ has a slightly more positive view of the economy after the release of the GDP data for Q1 earlier in the week.

We do not expect BoJ to expand its QE programme further. That said, it will be challenging for BoJ to reach the 2% inflation target next year, so further easing cannot be ruled out. In our view a downward revision of the inflation forecast for FY16 markedly below 2% is a necessary condition for additional easing from BoJ.

Even if one believes that it will be impossible for BoJ to reach the 2% inflation target in 2016, there is little pressure on BoJ to expand its QE programme in the short run. The trend in inflation through 2015 should be upwards unless the crude oil price starts to decline markedly again. Market-based measures for inflation expectations have also increased in recent months (see charts below). In addition, wage growth also appears to have picked up in connection with the spring negotiations albeit we need to see this confirmed in the data.

We still expect USD/JPY to move higher in the coming months but it is unlikely to be more BoJ easing that will push USD/JPY out of its narrow trading range so far in 2015. In the short run this will depend on a more hawkish perception of the Fed in the market.