150626 japan watch boj to delay monetary easing

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Japan Watch

Group Economics Macro & Financial Markets Research Maritza Cabezas & Roy Teo

BoJ to delay monetary easing

+31 20 343 5618

26 June 2015 •

Despite ongoing subdued inflation, the BoJ will likely postpone stepping up stimulus to early 2016 from our initial view of July 2015. For now, there are concerns that the fast pace of depreciation in the yen could lead households to cut down their spending as a result of the higher import costs. On top of this, in April, the BoJ delayed the timing of reaching the price stability target of 2% from 2015 to around the first half of fiscal year 2016. This and a more optimistic view from authorities on the Japanese economy, suggest that a new round of easing is unlikely this year.

However we judge that there will be further monetary stimulus early next year as we expect inflation to undershoot the BoJ’s forecast. We expect inflation to rise to around 1% in 2016. By early 2016, the pressure for the BoJ to maintain its inflation credibility will increase. The impact of higher import cost due to the weak yen will fade as the pace of yen depreciation against its trade weighted basket of currencies slows. We expect the yen to decline relative to the US dollar to 128 by the end of this year and 135 in 2016.

A delay in easing… change of BoJ communication

corporate balance sheets will remain strong. Corporate profits

We no longer expect the BoJ to step up its asset purchases in

in the last two quarters of 2014 were at record highs. Profits

July 2015, as several developments suggest it will be delayed.

have been partly buoyed by lower raw material costs as a

To begin with, in April 2015, the BoJ pushed forward the price

result of the drop in crude oil prices and higher overseas sales

stability target of 2% from 2015 to around the first half of 2016,

resulting from the weaker yen. These conditions should

mainly as a result of the lower oil prices and the impact on

continue.

inflation. The communication around the inflation target has also been changing. The price stability target is now seen as a

GDP growth recovery on the way % contribution

flexible concept with a certain range for upward and downward deviations of the actual inflation rate. This approach gives more flexibility for authorities to see how the “Abenomics”

10 5

strategy plays out as well as the outcome of wage negotiations, before adding more stimulus. At the same time, the Bank’s Policy Board has signalled that the underlying trend in inflation would be firmly maintained under the virtuous cycle of the economy. …as well as a too fast pace of yen depreciation…

0 -5 -10 -15 -20 Q1 2012

Investment Government consumption Inventories Net exports Private consumption GDP growth Q1 2013

Q1 2014

Q1 2015

On top of this, Mr. Kuroda in his latest verbal intervention has expressed concern about the yen’s pace of depreciation and

Source: Thomson Reuters Datastream

the negative impact on the economy. Indeed, the undesired pressures of a weaker currency on imported inflation for

On top of this, the 2015 wage negotiations agreement is likely

consumers is a strong reason for a more cautious approach

to result in a base wage increase of 0.6-0.7%, which is higher

when it comes to easing, given the recent setback in

than 0.4% increase in 2014. This is a modest increase should

consumption resulting from the VAT hike.

provide more confidence to consumers to increase their spending.

… while economy showing signs of recovery In the first quarter the economy performed better than

More easing needed …BoJ to maintain inflation credibility

expected. Real GDP grew by 3.9% up from 1.2%. The main

Though market measures of inflation expectations have been

drivers were private capital investment and inventories.

slowly increasing so far this year, consistent with a turnaround

Stronger capital investment is likely going forward, since

in global inflation expectations, they remain below the price


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