July 22, 2016, 17:30 JST

This Gentleman prefers surprises


From what we hear, many economists are expecting the BoJ to ease in its July meeting. Expect to be surprised. It is a close call, but we think the BoJ will decide not to ease this time. We have seen this act only a few months ago. In its April 27-28 meeting, the BoJ defied the market by deciding not to ease. The Japanese yen dully strengthened against USD from USD/JPY 111 on April 27 to USD/JPY 106 on May 2. The BoJ probably feels that Japan can persevere a similar hit. 

BoJ thinks it can afford to negatively surprise the market.

Just to clarify, we are not deciding on our BoJ call based on Governor Kuroda’s liking for a surprise. As we have written in the report we published in June "Time for Damage Control“, we think the BoJ has quietly changed its policy principle from “actively pursuing its inflation target no matter what” to “passively reacting to downside risks”. In its failed attempt to achieve 2% inflation in 2 years, the BoJ has nearly exhausted its resources, both in terms of the risk the BoJ can absorb, as well as what the Japanese financial system could take. 

There are a few meaningful easing measures the BoJ coud undertake. They are 1) lower its policy rate, 2) expand its ETF and J-RIET purchases, 3) expand its JGB purchases. However, these measures have costs and we think the BoJ would judge that the costs outweigh their benefits at the moment. The Japanese economy is not doing too badly now. Japan is expected to have somewhat positive growth in 2016 and in 2017. The yen is still at a level exporters can make sufficient profits. Brexit has passed without too much fuss. It is more prudent to save scarce monetary policy options for later stormy days and we think the BoJ is sensible enough to concur. 

The BoJ is already set to own 50% of the JGB market by early 2018.

For more details on our view, please see the aforementioned report, Time for Damage Control.