BOJ and ECB face similar problems

Haruhiko Kuroda (Governor of the Bank of Japan (BOJ)) is still optimistic about the current recovery and has stated that the economy is on track to the 2% benchmark inflation rate. In addition, consumption-led growth has been weak which has been due to the sales tax hike. The effect of the sales tax is still being shown in recent data such as household spending y/y (Actual: -5.9%, Forecast: -2.7%, Previous: -3.0%, 29/08/2014) and capital spending q/y (Actual: 3.0%, Forecast: 3.8%, Previous: 7.4%, 01/09/2014). This data is not going to stop the BOJ from raising the sales tax next year, as this will help cut the fiscal deficit. If there are any problems then the BOJ have many tools to handle the situation. In regards to a lack of consumption led growth, export led growth is dwindling. With the weak Yen, import costs are rising and the prices are falling on to consumers, hence the low household spending. 

The ECB shocked markets last week, with a cut in interest rates. The cut in rates included a cut in the refinancing rate from 0.15% to 0.05% and a cut in the deposit rate from -0.1% to -0.2%. This will devalue the Euro and this should kick-start the current stagnant recovery (Eurozone GDP q/q, Actual: 0.0%, Forecast: 0.0%, Previous: 0.0%, 05/09/2014). More importantly, it should reduce deflationary pressures, CPI flash estimate y/y (Actual: 0.3%, Forecast: 0.3%, Previous: 0.3%, 29/08/2014) is well below the 2% benchmark inflation rate. Thus, the rate cut should reduce the chance of a deflationary spiral. However, consumers may be able to nullify this rate cut by cutting spending in anticipation of lower inflation. Mario Draghi (President of the European Central Bank) has stated again and again that structural reforms need to take place to unlock further growth and to spur inflation. A lack of structural reforms has contributed to the stagnant growth.