BoJ likely to keep policy rates unchanged through 2020, says Capital Economics

The Bank of Japan (BoJ) is expected to keep policy rates unchanged throughout next year, after leaving on hold today and reiterated its readiness to ease policy if required, according to the latest research report from Capital Economics.

This result was correctly anticipated by the majority of analysts polled by Bloomberg, ourselves included. 13 out of 46 analysts had expected a cut in the short-term policy rate.

The Bank made its easing bias more explicit by noting that it “expects short- and long-term interest rates to remain at their present or lower levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost.”

But the bigger picture is that the Bank is surprisingly sanguine. It noted that the impact of slower overseas demand on domestic demand will remain “limited”. Indeed, it cited a wide range of factors that will support business and construction investment, the report added.

These include labour shortages, strength in R&D spending, record low office vacancy rates and the surge in inward tourism. It also noted that the IT-cycle is ripe for a pick-up as the largest shortfall in shipments relative to inventories already occurred in mid-2018.

Another factor that could prompt the Bank to ease policy would be a substantial sell-off in the stock market and a rise in credit risk premiums. Meanwhile, these factors feed into the Bank’s leading indicator for exports and could, therefore, signal a sharp fall in shipments, Capital Economics further noted in the report.