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The Bank of Japan (BoJ) is widely expected to stand pat at its monetary policy meeting, scheduled to be held this Thursday. The recent production and consumption data suggest that the economy continued to expand in Q3 2017, although the pace has slowed compared to the above-potential levels in Q2 2017. Thanks to the positive growth outlook in the short-term, there is little pressure for the BoJ to add monetary stimulus, DBS Bank reported.
That said, consumer prices remain very weak, dissuading the BoJ from withdrawing stimulus on the other hand. The CPI excluding fresh food and energy rose merely 0.1 percent y/y in July. Inflation expectations also remained subdued, affected by the weakness in the actual inflation rate. As such, companies were still cautious about raising wages for employees or raising their sales prices.
In the financial markets, the JGB yield curve is well anchored. The 10-year JGB yield hovered in the range of -0.1-0.1 percent over the past one year since the BoJ introduced the Yield Curve Control policy in September 2016 and set the long-term rate target at "around zero percent". The quantities of bond purchases were managed in a flexible manner. This month, for instance, the BoJ trimmed its buying of 5-10 year JGBs during the regular bond operation plans, thanks to rising demand for safe assets from the private sector amid the escalation in North Korea tensions.
In the FX market, the USD/JPY is caught between two forces – safe-haven buying as a result of geopolitical risks, and the expectations for higher US bond yields as a result of Fed tightening. In addition, there are now speculations that PM Abe may consider a snap election within this year, as early as October, in order to take advantage of the recent improvement in his approval ratings.
An Abe win in a snap election could increase the chance for BoJ Governor Kuroda to be given the second term in 2018, fueling investors’ expectations for a weak yen and an extended period of loose monetary policy, the report added.
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