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Japan: Bank of Japan preview

Thu, Oct 29 2009, 13:24 GMT
by Flemming J. Nielsen

Danske Bank A/S

• The focus of attention at tomorrow’s monetary meeting is expected to mainly be on the release of the BoJ’s revised growth and inflation forecast. We expect the BoJ’s growth forecast to be revised up. Attention should particularly be paid to the BoJ’s 2011 inflation forecast, as it should give some idea about how long the BoJ expects deflation to prevail.
• While we expect most non-conventional easing measures to be scrapped soon, this is in our opinion unlikely to be announced before the November monetary meeting. However, non-conventional easing has been modest in Japan and unwinding should be less complex in Japan.

BoJ to publish new macroeconomic forecasts

In line with the consensus view we expect the BoJ to keep its leading O/N target rate unchanged at 0.1% in connection with tomorrow’s monetary meeting. We expect the focus of attention tomorrow to mainly be on the release of revised macroeconomic forecasts from the BoJ. We expect the BoJ to raise its GDP forecast slightly for both Fiscal 2009 and Fiscal 2010 as the economy has recovered faster than expected in the BoJ’s latest forecast (see next page for the BoJ’s latest forecast). We should pay particular attention to the BoJ’s inflation forecast. We believe that most commentators agree that the BoJ is unlikely to hike its leading interest rate as long as the year-on-year inflation rate remains negative. At the monetary meeting tomorrow the BoJ is set to release, for the first time, its inflation forecast for Fiscal 2011 and it should give
us some idea of how long the BoJ expects inflation to remain in negative territory. In addition, there will be attention on BoJ’s plans for its non-conventional easing measures. In our opinion, most of the non-conventional easing programmes, including the purchase of commercial paper, purchase of corporate bonds and special US dollar funds supplying operations will not be extended beyond 2009. However, it is more likely to be announced at the November monetary meeting. Importantly, we do not expect the BoJ to reduce its purchase of government bonds, as this is regarded as a normal monetary instrument. Anyway, the termination of most of the non-conventional easing measures should have little market impact as the size of the programmes is now negligible. Overall the size of quantitative easing by the BoJ has been modest compared with that of the ECB and the Fed and hence the unwinding will be much less complex for the BoJ.

Financial markets see little chance of rate hike before H2 2011

As deflation will continue for some time the consensus view is that the BoJ will lag the ECB and the Fed considerably in the monetary tightening cycle. 1-year and 2-year O/N forward is currently trading at 0.13% and 0.21% (mid-price) respectively, suggesting the market sees little chance of a rate hike before H2 2011. We share the view, that the BoJ will lag the ECB and the Fed in the monetary tightening cycle. However, inflation forecasts suggest year-on-year inflation could turn positive in late-2010 and the first rate hike for that reason could come as soon as early-2011. 

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Published on  Thu, Oct 29 2009, 13:28 GMT