BoJ Preview: Additional easing steps coming this week - RBS

Jin Kenzaki, Japan Senior Economist at RBS, expect the BoJ to take additional easing steps at this weeks meeting, due to the likely prolonged situation of the upward tendency in the yen, and the failure to meet inflation targets.

Key Quotes

“The specific steps we foresee are (1) raising ETF repurchases from 3.3TY to 7.0TY; (2) cutting negative interest rates applicable to certain BoJ current deposits from negative 0.1% to negative 0.2%; and (3) lowering the interest rates on loans made under the Loan Support Program from zero to negative 0.1%.

Given the ongoing high levels of uncertainty from (1) rekindling of concerns about the Chinese economy, (2) the presidential election in the US, and (3) Britain leaving the EU, at a minimum the Fed is expected to hold off on any rise in interest rates, and the yen is highly likely to continue to trend higher. In addition, there is a distinct decline in the expected inflation rate. The BoJ Tankan forecast for the inflation outlook for companies of all sizes and all industries (one year out) has declined for four quarters in a row, from +1.4% in June 2015 to +0.7% in June 2016.

However, in light of the June BoJ Tankan, it would seem difficult to unilaterally push negative interest rates lower.

Note that if the BoJ takes additional easing measures this time, but nevertheless does not reduce negative interest rates further, the financial markets may interpret this as the BoJ having started to feel the limits of pushing negative interest rates further down. As discussed below, given the awareness on the part of the financial markets of the limits to increasing purchases of government bonds, in order to demonstrate the absence of limits on policy measures, if additional easing steps are to be taken, there may be no way to avoid additional measures to further lower negative interest rates.

At the same time, any decision to increase purchases of government bonds is likely to be taken with great caution, so as to keep open options for future easing measures. Given the political risk next year in Europe, the Fed is likely to put off raising rates. In addition, our calculations show that through next year the rise in the CPI excluding food and energy (BoJ-style core CPI, the metric the BoJ focuses on) will slow YoY to 0.5%, making it likely that the BoJ will be pressured to take additional easing measures next year as well. On the other hand, considering the demand for collateral from financial institutions, increases in purchases of government bonds are approaching their limit. Together, the above makes it likely that any decision to increase purchases of government bonds will be taken with great caution.”