BoJ likely to stand pat this week, to sound more upbeat on growth outlook: DBS Bank

The Bank of Japan (BoJ) is expected to stand pat this Friday, keeping the policy rate at -0.1 percent and the 10-year JGB yield target at 0 percent. The central bank may sound more upbeat on the growth outlook during the policy statement, citing the recovery in exports, pickup in investment and decline in unemployment rate.

While the first-quarter gross domestic product (GDP) was revised down to 1.0 percent q/q (saar), from 2.2 percent in the preliminary estimate, it was largely due to inventory destocking instead of a weakness in final demand. The high-frequency production and consumption data suggest that Q2 growth will be strong.

But the BoJ will have to admit the weakness in inflation. CPI figures were stuck in the range of 0-0.5 percent y/y through Jan-Apr, undershooting the central bank’s 2 percent target by a wide margin. The Q2 Tankan survey due in early-July will likely show that inflation expectations remain subdued in the corporate sector, weighed down by the slide in oil prices and weakness in the actual CPI.

Accordingly, chances are high that the central bank will cut inflation forecast and postpone the 2 percent prices target again when it reviews the medium-term economic projections at July’s meeting. With a sluggish inflation outlook, the BoJ will remain a laggard among the G3 central banks in normalising monetary policy.

"The US Fed is widely expected to hike rates on Thursday’s FOMC meeting, accelerating the pace of rate increases to 25 bps per quarter so far this year from 25 bps per year in 2015-16. The BoJ, on the other hand, will likely reiterate this week that it will continue to expand monetary base until inflation exceeds the 2 percent target and stays above it in a stable manner," DBS Bank commented in its latest research report.