October 7, 2015, 19:30 JST

BoJ sees no need to add monetary stimulus

Listening to Governor Kuroda's press conference, it seems clear to us that the BoJ is not inclined to implement an additional monetary stimulus any time soon. In his guarded answers to questions from the press, he managed to communicate a few important messages. 

1) 2014 and 2015 are different. 

He said that the trend of prices in Japan is clearly pointing upward this year, unlike in 2014 when the BoJ decided to ease. Indeed, CPI excluding fresh food and energy, his favorite measure these days, show a rising inflation trend throughout the most of 2015. In 2014, the same measure started to decline in August, apparently prompting the BoJ to decide to ease in October. 

2) A downward revision in its economic forecast needs not lead to an easing

Mr Kuroda said he regards the effect from energy prices as merely transitory in Japan and went on to say that even if the BoJ is to change its CPI forecast when it publishes it at the end of October, it may be a mere reflection of the change in energy prices and not necessarily a change in the BoJ's assessment of the future price trend. Basically, he implied that the BoJ can revise down its quarterly published GDP/CPI forecast without taking any policy actions. 

3) BoJ is not considering cutting the interest paid on reserve

At the very end of the press conference, a reporter explicitly asked if the policy board has discussed the possibility of cutting interests paid on reserve. Mr Kuroda, perhaps a little relaxed that the press conference is almost over, gave an unusually straightforward answer. He said that the board did not talk about it and he thinks that the chances are quite slim that the BoJ would take such action in future.  

Otherwise, he repeated his usual view that the positive cycle connecting growth, profits and spending are working in a desirable manner in Japan. In our view, the results from the recent BoJ Tankan must have emboldened his view. 

Monetary policy implication

We conclude that the BoJ is unlikely to decide to ease any time soon. In our view, some of the BoJ policy board members are no longer convinced of the effectiveness of the quantitative easing and instead they are growing wary of the ever growing balancesheet of the BoJ. The rapid rise of its market share in the JGB market, over 31% by the end of September 2015, is particularly worrisome. By merely keeping its current policy, the market share will rise to 40% by the end of 2016.

We also suspect that the majority of the board members, including Mr Kuroda himself thinks that the depreciation of yen has gone far enough. Indeed, on real terms, the yen is now as weak as it was in early 1970s.

Another factor at play is the absence of time limits to achieve its inflation target. When Kurodanomics started in 2013, it openly aimed to accomplish the inflation target in 2 years. Now that it already missed the deadline, the BoJ seem more relaxed about when it has to achieve the goal. 

In such circumstances, Mr Kuroda will have a hard time convincing the majority of the board of the need to ease as it will constrain the room for maneuver in future. They would rather wait and save the ammunication to ease for the rainy days. In our view, it will probably require a substantial change in the economic or financial circumstances, such as another significant rout in equity prices, say by more than 15%, or yen appreciation of similar magnitude, to force the BoJ to implement an additional easing in the near terms.