Strategy Bulletin  

29/10/2015

BANK OF JAPAN MONETARY POLICY MEETING TO BE HELD ON 30 OCTOBER, 2015

Bank of Japan Monetary Policy Meeting: what to expect?

What do we expect on 30th October?
We expect the Bank of Japan (BOJ) to introduce a new dovish policy innovation tomorrow. Ideally, the BOJ should expand its asset purchases (by JPY 10 trillion per year) and reiterate its commitment to reach 2% price stability target by the first half of 2016. We believe that the probability associated with this scenario is still substantial. It is possible, however, that the bank decides to maintain the current pace of asset purchases but tries to boost its impact by hinting that it might expand the asset purchase program in the near future or by introducing qualitative adjustments such as more explicit calendar guidance or a shift in favor of private sector assets. Negative interest rates could be introduced for excess reserves, but we assign low probability to this outcome in light of the BOJ Governor Kuroda’s recent comments against it. In either case JPY will likely weaken further and Japanese equities will get fresh support. Inaction at this juncture, however, will be detrimental to the bank’s credibility since domestic inflation has little chance of reaching the bank’s target in the its promised timeframe without any additional policy boost.

What is our view on the apparent push-back against additional easing by Finance Minister Aso and Abe advisor Hamada?
We acknowledge that the cabinet's support for monetary easing might not be as strong as it used to be at the onset of Abenomics. This is due to the fundamental political difficulty of selling the gradual erosion of real income to aging voters (0.5% potential growth and 2% inflation target point to this outcome). We also attribute Mr. Hamada's comments to this political consideration, although he might have been also influenced by the apparent narrowing of labor market slack.
We note, however, that the Bank of Japan still faces deeply entrenched deflationary mindset in Japan, and proving its mettle on reflation lies at the heart of its new easing efforts. It happens that this is the very moment to do so. Both market-based and survey-based inflation expectation have softened recently, and weak industrial output and trade data increase the risk that the country had another quarter of negative growth in Q3. We firmly expect the BOJ to focus on this compelling economic rationale. That said, the BOJ could show some dexterity in terms of the easing details to make it more politically manageable for the Abe cabinet. This is why we see significant risk of qualitative innovation in the asset purchase program.

How are we positioned for the policy event?
We are overweight in Japanese equities in all of our portfolios, and we also continue to maintain significant USD exposure in our Japanese yen accounts.

Homin Lee, Regional Economist for Asia.
 

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