September 14, 2015, 23:30 JST

BoJ could ease tomorrow

In our view, there is a fair chance, say 25-35%, that the BoJ may decide to ease when it concludes its two days policy meeting on September 15. Here are three reasons why we think why the bank might.

1)    The confidence in Abenomics is deteriorating

There has been a number of damaging economic news in the past few weeks, including the news that the Japanese economy shrunk in the April-June quarter. However, in our view, the one particularly confidence-shaking news was on the topic of wage growth in Japan. Earlier in the year, government officials and Japanese media played up the request Prime Minister Abe made to Japanese corporate leaders to raise their employees’ wage and how that is resulting in some unusually positive outcomes in the so called Spring Wage Negotiations. However, subsequent data releases showed that there is no strong evidence that the wages in Japan is starting to grow in any marked way. In June, the total wage in fact fell severely by 2.5% year on year. As we commented here, there are some evidence that the low wage growth has been damaging consumer confidence and leading to deflate the inflation expectation.

 

2)    Japan’s economic outlook has markedly deteriorated in the past 2 months

According to the monthly Bloomberg survey, there has been a marked downward revision to Japan’s economic outlook in recent weeks. Between early July and early September, the consensus forecast for private consumption growth in 2015 has been revised down from 0.0% to -0.8% according to Bloomberg. The forecast for exports growth in 2015 was severely cut from 7.1% to 2.3% in the same period. The weaker outlook for private consumption and exports are of particular concerns to the BoJ as it shows that the chain of economic consequences underlying Abenomics policies are breaking down. Moreover, the downward revisions are not just on 2015, but also on 2016. According to the same survey by Bloomberg, the consensus GDP growth forecast for 2015 and for 2016 were 1.0% and 1.5% in early July. In early September, they were 0.7% and 1.2% respectively. 

3)    Fool me twice, shame on the market

In April 2015, the BoJ formally gave up its original target of meeting the 2% inflation target in FY 2015 and postponed the timing to the first half of FY2016, that is, by the end of September 2016. Even that is now looking increasingly suspect. We have some sympathies for the BoJ as we think the bank could have achieved its target if not for the sales tax rate hike in 2014 and the severe decline in the crude oil price in the past 12 months. However, the loss of credibility of the BoJ could be severe if the bank fail to meet its target twice, and especially if the bank is seen as not even trying. As the saying “Fool me once, shame on you, fool me twice shame on me” goes, if the BoJ is seen as not even trying to meet the target, whatever the BoJ may say it commits to in future will be considered as not credible by default.

What can the BoJ do? 

In our view, expanding the amount of  JGB purchase may not be cost effective any more. Even at the current pace, the BoJ will own more than 50% of the market by 2018. Efforts by the BoJ to lower interest rates could also be perceived as fueling a currency war. That leaves the ETF and J-REIT purchases as the monetary policy tool of choice. Doubling the pace of ETF and REIT purchase may also be justified as their prices have taken quite a beating in the past few weeks. The move could be criticized as a blatant intervention in the stock market, but that river was already crossed when the BoJ formally embraced stocks and J-REIT as a fair game for monetary policy tools as far back as in 2010.