Bank of Japan Rate Decision Preview: Certainty and then some

The Bank of Japan is universally expected to keep its monetary policy unchanged Thursday in Tokyo, though the global central bank tilt towards easing could spur action from a reluctant Governor Kuroda later in the year.

With its Australian and New Zealand neighbor’s having each cut their base rate 0.25% to 1.25%, with the Federal Reserve and European Central Bank moving to supporting their economies and with the Chinese economy mired in a trade dispute with the United States it may be hard for the Bank of Japan to refrain despite having done nothing to normalize its rate policy in a quarter century.

Reuters

The Japanese central bank overnight call rate has been at -0.1% since February 2016.  For the eight years before that it was at 0.1%.  It has not been above 0.5% since September 1995.

Reuters

Japan and the BOJ are in the uncomfortable position of facing the risk of a global economic slowdown without any of the standard interest rate policy tools.  Still the bank may be forced to act if the US and the ECB reduce rates simply to keep the yen from appreciating.

The yen has gained 3.8% versus the dollar since late April and 5.6% since last October. 

An appreciating yen squeezes the overseas profits of Japanese corporations and lowers the prices of imported goods generating even stronger deflationary pressures in an economy that has struggled with price declines for two decades.

Reuters

Governor Kuroda has maintained that the BOJ has the ability to stimulate the economy should that be necessary.   The bank could cut rates below their current -0.1%, though the efficacy of negative rates in fostering growth is an open question.  The bank could expand asset purchases but since the effect of that is to lower rates the question on its effectiveness is the same.  Increasing the money supply which would make more cash available to businesses and consumer could be tried but that will only have an effect if liquidity is tight, which with rates at -0.1% is not the case.

While it might necessary for the BOJ to act if the Fed and the ECB reduce rates and while bank action might keep the yen from appreciating, it will do little to enliven the Japanese economy.

Governor Kuroda has said recently that no policy action is needed now, with the economy expanding at a 2.1% annual rate in the first quarter the fastest in 18 months.

 The bank will likely want to wait for a Fed decision to cut rates and for the outcome of the US-China talks expected at the G-20 summit in Japan later this month.

A successful trade deal might alleviate the need for a US rate cut by providing the global economy with a substantial uptick in growth and an equally large reduction trade war concerns.