Bank of Japan Preview: BoJ's accommodative policy not about to change

We expect the Bank of Japan (BoJ) to maintain its ‘QQE with yield curve control’ policy unchanged at its monetary policy meeting ending on 20 July. It is widely expected that the BoJ will keep its monetary policy unchanged, especially after it earlier this month demonstrated its strong commitment to yield curve control by announcing an unlimited fixed-rate purchase of 10Y JGBs. The announcement should not have any significant impact on price actions.

Economy improving…

Since the previous BoJ meeting, data have been a little mixed. Exports, which have been the primary driver of economic growth in Japan for the past couple of years, showed weakening signs in Q2 following a few impressive quarters. However, Japanese exporters enjoyed a tailwind from the weak JPY in Q2 and in the recent Tankan business survey large enterprises were increasingly upbeat on exports, although expectations on domestic sales are actually the key driver in the better survey. Domestic demand has shown signs of improvement recently, with both retail sales and consumer confidence looking fairly good. The BoJ’s latest outlook report from late April showed expected 1.6% growth in real GDP
for the fiscal year 2017, which would mean a further increase in the already-positive output gap. We could see a slight upward revision of this forecast on Thursday.

…but inflation outlook remains low

While the real economy is improving, consumer price inflation (CPI) has remained very low and we expect the BoJ to cut the outlook for CPI excluding fresh food (the measure BoJ targets) for the fiscal year 2017 from the current 1.4%. Inflation has increased in 2017 but it still stood at only 0.4 % y/y in May and wage inflation remains very low. Almost three decades of very low inflation mean companies are reluctant to raise prices and are trying to cut back on services and streamline their operations instead. The Tokyo inflation index, which follows the overall index closely, was completely flat year-on-year in June and, even though the labour market is still running hotter with the jobs to applicants ratio setting a new record each month, it looks as though it could still be a while before inflation begins to take off and the BoJ needs the global economic recovery to stay on track for this to happen.

Rising political uncertainty the main risk to BoJ’s policy

The BoJ has explicitly promised to continue easing until inflation expectations are above the 2% target on a sustainable basis. In our main scenario, we expect the BoJ to keep its policy unchanged throughout our 12M forecast horizon, assuming that BoJ governor Haruhiko Kuroda is reappointed when his current term as governor ends in April 2018. The main risk to the BoJ’s currently extremely accommodative policy stance is Prime Minister Shinzō Abe’s plummeting approval rating. Recently, it has tumbled to around 35% in the wake of a series of scandals involving Prime Minister Abe and his close political allies and accusations that he used his influence to secure the approval of a new department at a university run by a close friend. 

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