Bank of Japan (BoJ) as expected did not announce any new easing measures in connection with today's monetary meeting. The target for expansion of the monetary base (now the main policy instrument) was as expected maintained at JPY60-70trn annually and approved in an unanimous decision by the nine members of the BoJ board.
BoJ's view of the economy was also broadly unchanged. BoJ believes the economy is recovering and will continue to recover moderately.
BoJ continues to regard the main risks to the Japanese economy as mainly external (the European debt crisis, emerging markets and the pace of the recovery in the US). At the press briefing after the meeting BoJ board governor Haruhiko Kuroda said that ‘BoJ did not change its view on the economy after the Q3 GDP data' and ‘it is too early to talk policy changes as the economy is on track', underscoring that the slowdown in GDP growth in Q3 to 1.9% q/q ann. from 3.8% q/q ann. in Q2 has not pushed BoJ in the direction of further easing in any substantial way. Kuroda also said ‘it is too early to discuss exit strategy', underscoring that tapering is unlikely to be on the agenda in Japan any time soon.
Board member Takahide Kiuchi at the meeting again proposed changing the wording of the inflation target so it does not include the aim of reaching 2% inflation within a two-year time frame. Instead Kiuchi proposed that the time frame for achieving the 2% inflation target should instead be ‘medium to long term'. Kiuchi's proposal was again defeated in a 8-1 vote. Kuichi is concerned that the inflation target is too ambitious and in the end could undermine BoJ's credibility.
The main message from BoJ today is that it remains on auto-pilot and is unlikely to announce any additional easing soon. However, looking further ahead GDP is poised to slow markedly in Q2 14 in the wake of the planned increase in the sales tax from 5% to 10% in April 2014 and we believe this could force BoJ to ease monetary policy even more aggressively at some stage in Q2 next year. There has been no major market impact from the BoJ announcement. JPY has weakened overnight but this was driven mostly by strong US retail sales data, the FOMC minutes and renewed focus on possible Fed tapering soon. Our fundamental view on JPY remains: further JPY weakness next year due to the divergent monetary paths in Japan and the rest of the world.
BoJ continues to regard the main risks to the Japanese economy as mainly external (the European debt crisis, emerging markets and the pace of the recovery in the US). At the press briefing after the meeting BoJ board governor Haruhiko Kuroda said that ‘BoJ did not change its view on the economy after the Q3 GDP data' and ‘it is too early to talk policy changes as the economy is on track', underscoring that the slowdown in GDP growth in Q3 to 1.9% q/q ann. from 3.8% q/q ann. in Q2 has not pushed BoJ in the direction of further easing in any substantial way. Kuroda also said ‘it is too early to discuss exit strategy', underscoring that tapering is unlikely to be on the agenda in Japan any time soon.
Board member Takahide Kiuchi at the meeting again proposed changing the wording of the inflation target so it does not include the aim of reaching 2% inflation within a two-year time frame. Instead Kiuchi proposed that the time frame for achieving the 2% inflation target should instead be ‘medium to long term'. Kiuchi's proposal was again defeated in a 8-1 vote. Kuichi is concerned that the inflation target is too ambitious and in the end could undermine BoJ's credibility.
The main message from BoJ today is that it remains on auto-pilot and is unlikely to announce any additional easing soon. However, looking further ahead GDP is poised to slow markedly in Q2 14 in the wake of the planned increase in the sales tax from 5% to 10% in April 2014 and we believe this could force BoJ to ease monetary policy even more aggressively at some stage in Q2 next year. There has been no major market impact from the BoJ announcement. JPY has weakened overnight but this was driven mostly by strong US retail sales data, the FOMC minutes and renewed focus on possible Fed tapering soon. Our fundamental view on JPY remains: further JPY weakness next year due to the divergent monetary paths in Japan and the rest of the world.
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