BoJ forced to deliver new round of stimulus on weak outlook
We expect there to be pressure on the Bank of Japan (BoJ) to deliver additional stimulus in connection with its monetary meeting next week, where we expect it to revise both its inflation and growth forecasts markedly lower. At the meeting, we expect the BoJ to expand the target for its asset purchases by another JPY10trn to JPY65trn.
With the BoJ’s extreme focus on exchange rate development, the recent depreciation of the JPY could be an argument for more cautious monetary easing. However, the recent depreciation of JPY to some degree reflects the market perception that the BoJ will deliver relatively aggressive monetary easing and less than JPY10trn in stimulus would probably be met with some appreciation of JPY.
Pressure on BoJ for more stimulus
The BoJ will release revised macroeconomic forecast in connection with its monetary meeting on 30 October. We expect it to revise both its growth and inflation forecasts markedly lower (see table below for the BoJ’s latest forecasts and our current forecasts). We now estimate that GDP contracted 2.4% q/q A/R in Q3 and expect GDP to contract 1.2% q/q AR in Q4. Hence, Japan is now facing a recession in the sense of two consecutive quarters of negative growth.
Hence, there will be considerable pressure on the BoJ to deliver more monetary easing in connection with next week’s monetary meeting. For this reason, we expect the BoJ to raise the target for its financial asset purchase programme by JPY10trn to JPY65bn. Specifically, we expect the target for asset purchases by end-December 2012 to stay unchanged at JPY40bn, the target for asset purchases by end-June 2013 to increase by JPY5trn to JPY55trn and the target for asset purchases by end-December 2013 to increase by JPY10trn to JPY65trn (see current plan for BoJ asset purchases in table below).
If we are right, the implication is that the pace of asset purchases will not be speeded up immediately but instead the BoJ will create space to continue its assets purchase at a relatively fast pace next year. Should the BoJ, against our expectations, raise the target for its end-December 2012 asset purchases, it would be a more aggressive easing move.