The bank of Japan decided to lower the interest rate on excess reserves to -0.1% on January 29. In our view, the move constitutes a significant monetary easing and also enhance the effectiveness of its future easing when required. The change today was not merely a 20bp cut in its policy rate. The BoJ basically broke the zero bound on the interest rate. When we consider the dire long term outlook for the Japanese economy, a negative interest rate is in fact only natural. There is no reason that the BoJ should stop at -0.1%. Further negative economic news should prompt the market to price in further cuts in the policy rate. While there is no silver bullet in killing the deflation risk, the move today shows that the BoJ has the tools to fight the deflation risk if the global economic tide is to turn against the Japanese economy in 2016. Read more..
Despite the convoluted way the BoJ announced it today, the measures the BoJ implemented were nothing short of an easing in their monetary policy. In our estimate, the BoJ will be absorbing 12.5% more aggregate duration risk from the JGB market and increasing its equity purchase by 10%. Accepting foreign currency denominated assets as collateral also nudges Japanese banks to invest abroad, indirectly weakening yen. In our view, it was a positive surprise from the BoJ and the market is wrong to dismiss the measures as ineffective. Read more..
Cabinet Office revised up its estimate for the real GDP growth in the July-September quarter to 0.3%, up from -0.2% in their initial estimate they released on November 16. The upward revision erases the stamp of a recession from 2015. It should be a relief for policy makers and helps them maintain their stance that all is well with Japan. We do believe there are some merits to their optimism, at least as far as the economic outlook for 2016 is concerned. The labor market in Japan continues to tighten, falling energy prices should help consumers spend their money elsewhere and the 3.3 trillion yen supplementary budget the government is planning should also provide some boost. We may even see more evidence of private capital investment growth. However, in the medium terms, the Japanese economy remains reliant on policy stimulus and there is no evidence that the growth in Japan is becoming sustainable without the help from the government. Read more..
Retail sales are becoming quite robust in Japan. In the 6 months to October, retail sales expanded by 4.4%, a remarkable growth for Japan. The inbound tourism consumption is likely to have given a large boost. Japan Tourism Agency estimates that the inbound tourism consumption in the July-September quarter reached 1 trillion yen threshold, almost doubling from a year ago. Japanese households must also be loosening their purse. Fundamentals are in fact encouraging for Japanese consumers. While the wage growth remain subdued, employment opportunities seem plentiful. The sizable decline in energy prices are also enabling consumers to spend the money elsewhere. In our view, the retail activity in Japan can remain on the roll until April 2017 when sales tax is scheduled to rise. Read more..
So it is official. Japan had a technical recession in 2015. However, we would emphasize the word technical. With the rapidly shrinking working population, the potential growth rate of Japan is very close to zero. Having zero or moderately negative growth is no longer a big deal for Japan. In the last 5 years, Japan had three separate recessions. The likely responses from the Japanese policy makers reflect such business as usual nature of the recession. The Abe cabinet will likely compile a supplementary budget, but it will be half-hearted, with the aim mostly to win sympathies for the ruling party ahead of the Upper House election next summer, rather than boosting the economic growth. Similarly, the BoJ is unlikely to concede its position that Japan is still on its way to reflation. While we are not pessimistic on the near term growth outlook, we certainly do not think that Japanese is any closer to achieving a sustainable growth. Read more..