• We expect the BoJ to keep its 'QQE with yield curve control' policy unchanged at the next monetary policy meeting ending on Thursday, 19 September.
  • The economy is still going strong, which calls for patience considering the limited tools left at the BoJ's proposal. The global economy is the most important driver of deflationary pressures in Japan.
  • The VAT-hike and global political uncertainty pose risks to the economy and upward pressure on the yen. The probability of further easing has risen.
  • USD/JPY has moved up to 107s as expectations have been building for positive outcomes in global fiscal policy, monetary policy, US-China relations and the global industrial cycle. We remain rather cautious of such pricing and expect USD/JPY will continue to stay in a downward drift. We target 105 in 3M and still see substantial potential for going below that target.

Strong economy

The state of the global economy and global monetary policy will be discussed heavily when the board members of the BoJ meet on Wednesday. On the one hand, Fed easing could add pressure on the BoJ to ease in order to avoid a further strengthening of the yen. On the other hand, easing abroad could give some relief to the global economy, which would ease the pressure on the (Japanese) manufacturing sector and on the safe-haven yen. There is no doubt that the BoJ will follow market reactions to the Fed's decision on Wednesday closely.

Manufacturers have struggled but the sector PMI index has held up, hovering between 49 and 50 since the beginning of the year. Industrial production is down 1% yoy, a minimal contraction in a global perspective. However, the domestic economy has been solid and GDP growth has surprised on the upside in H1 with an average annual growth rate of 1セ%.

Like the Fed, the BoJ has to consider whether the good fortune could be turning. The nominal effective yen is up 8% yoy, which continues to add pressure on Japanese exporters by eroding competitiveness and it weighs heavily on prices of imported goods. So far, the deflationary pressure has not materialised, but it is likely to do so in coming months if the surge in the yen is not broken and global deflationary trends continue.

Signals from board members still indicate some patience

At the last policy meeting in end-July, Kuroda mentioned the possibility of pre-emptive easing and said, " We will take policy action without hesitation, if necessary to avoid the risk of prices losing momentum" . Since then and after the trade war intensified and the yen surged, we have seen three board members, including Kuroda, on the wires.

Goushi Kataoka, the board's super dove, gave a speech where he stressed that the need for additional easing is heightening - no surprise here. He also mentioned the side effects of further easing as something to watch for and he has not decided whether he is going to put a proposal to cut the short-term rate to a vote. Hitoshi Suzuki, a former commercial banker who is probably the most hawkish in the nine-member board, sees no need to ease further. He is afraid that if bank deposit rates effectively turn negative, it could hurt the economy by cooling consumer sentiment.

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