Bank of Japan revises forecast lower but does not signal imminent easing

Bank of Japan (BoJ) as expected did not announce any new easing measures in connection with today’s monetary meeting. The target for the annual expansion of the monetary base (the main policy instrument) was maintained at JPY80trn in a 8-1 vote. It was also the consensus view that BoJ would be on hold at today’s meeting, albeit there were a few who believed that the QE programme could be expanded.

As usual, board member Kuichi was the sole dissenter. However, at today’s meeting Kuichi went as far as proposing to cut the size of the QE programme substantially by reducing the target for the annual expansion of the monetary base to just JPY45trn (the proposal was defeated 8-1). Kuichi is a lone wolf on the BoJ board and hence one should not read too much into his proposal. That said, there is probably no clear consensus on the BoJ board. The last expansion of the QE programme in October 2014 was approved with only a 5-4 majority. Hence, the threshold for further expansion of the QE programme is probably quite high.

As expected of BoJ revised its GDP and inflation forecast lower but overall these were small downward revisions that do not signal any imminent easing. The forecast for GDP growth in fiscal year 2015 (FY15) was revised slightly lower to 2.0% (previously 2.1%) and the forecast for FY16 was also revised slightly lower to 1.5% (previously 1.6%). The inflation forecast (CPI excl. fresh food) for FY15 was revised lower to 0.8% (previously 1.0%) and the inflation forecast for FY16 was revised lower to 2.0% (previously 2.2%). Hence, BoJ still expects to be able to reach its 2% inflation target at some stage in 2016, which is a bit late compared to the two-year time horizon BoJ gave itself to reach the 2% inflation target in early 2013.

It is still our view that BoJ will not expand its QE programme further. The main arguments are i) inflation appears to be bottoming out and should increase markedly in H2 15 as the lower oil price weighs less on inflation, ii) wage growth also appears to have picked up in connection with the spring wage negotiations, iii) GDP growth is still expected to be above potential in the coming quarters and iv) at the moment there is no substantial political pressure for more easing, because focus in the domestic political debate is currently on the negative impact from a weaker JPY on consumption.

That said, it will be difficult to reach the 2% inflation target within the next year, so further easing cannot be ruled out. In our view a downward revision of the inflation forecast for FY16 markedly below 2% is probably a necessary condition for additional easing from BoJ. However, with no clear consensus on the BoJ board it is also possible that it instead will be more inclined to give itself more flexibility (time) to reach the 2% inflation target. We stick to our call that BoJ will not expand its QE programme further

We still expect a USD/JPY to move higher in the coming months but it is unlikely to be more BoJ easing that will push USD/JPY out of its narrow trading range so far in 2015. In the short run this will depend on a more hawkish perception of the Fed.