The Bank of Japan kept its policy unchanged on November 19. In the press conference after the meeting, the BoJ governor Kuroda took pains to maintain the distance between the bank and the government in order not to appear to criticize the decision made by PM Abe to postpone the sales tax hike while at the same time to evade the criticism that the BoJ is simply bankrolling the fiscal deficit. There was one unusual element to his press conference today though. Mr Kuroda is usually a very cheerful man, often visibly chuckling to the tricky questions posed by reporters. However, he was unusually sulky today. Read more..
Our outlook for the Japanese economy has substantially changed in the last three weeks. The change is most pronounced for 2016 where we are revising up our forecast from 0% growth to 1.2% growth. By effectively cancelling the sales tax hike and adding fiscal stimulus, the fiscal policy in Japan will remain as loose in 2015-16 as in 2013-14. The monetary policy is being loosed further in 2015-16. With the QQE2, the BoJ is now buying 150% of JGB issued by the government, up from 90% under QQE1. Pundits may argue that the loose-loose fiscal and monetary policy risks destroying the credibility of Japan to maintain its fiscal sustainability. While we agree, we think it is a gamble Japan needs to take. Defeating deflation is a pre-requisite in regaining fiscal sustainability and the tax hike in 2015 could have destroyed the last chance for Japan to inflate itself. Read more..
The Japanese economy contracted by 0.4% quarter on quarter (QoQ) in the July-September quarter. In our view, there is no need to be depressed by the weak result though. Government officials are already responding to the news by adding stimulus. The monetary stimulus implemented by BoJ should have significant effects to boost the economy through higher equity prices, lower yield and weaker yen. PM Abe is about to announce fiscal stimulus measures. Some may criticize him for not following through with fiscal reform plans, but we would rather praise him for his decision. Defeating deflation is the top priority for Japan and a requisite for Japan to regain fiscal health. We also like to note that there are signs that Japanese economy is already starting to recover from the blow from the sales tax hike. Retails sales have expanded robustly in the last two months and there are signs that corporate managers are warming up to implement capital spending. The cancellation of sales tax hike should further help them gain confidence. If the anticipation of weak GDP figures helped Mr Abe make that decision, it was a blessing for Japan. Read more..
With a hindsight, October was the last month the BoJ conducted its JGB purchase operation under the previous guideline announced in April 2013. In October 2014, the BoJ bought 7.8 trillion yen of JGBs, with their average maturity at 6.4 years. From November on, the BoJ will be purchasing JGBs under the new guideline, 8 to 12 trillion yen per month with their maturity 7-10 years on average. By expanding the amount and extending its maturity, the BoJ will be almost doubling its firepower of its JGB purchase when measured in duration risk. With the short to medium term interest rates close to zero, the BoJ is targeting to push down long term interest rates. 10 year rate is already as low as 0.45%, but 30 year rate, at 1.52% as of November 6, it offers some room to be compressed. Read more..
Kuroda knows when to go ALL in. Bank of Japan unexpectedly eased today (Oct.31) by announcing a massive expansion of their asset purchase program. The bank will increase its net-purchase of JGB from 50 trillion yen per year to 80 trillion yen and reallocate its purchase toward longer and riskier JGBs. In our estimate, the BoJ doubled its purchase of JGB duration risk by today's measure. The BoJ is effectively betting all it has to achieve its inflation target and to urge fiscal policy makers to regain the fiscal sustainability of Japan. In our estimate, it would have been 2020 when the BoJ owns 50% of the JGB market. With today's announcement, the BoJ could end up owning 50% of JGB market by as early as in 2018. The BoJ is basically declaring that Japan will need to fix its long term problems by 2018, or risk becoming a failed nation. Read more..