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The BoJ will hold a Monetary Policy Meeting (MPM) on 6-7 October. It is believed the central bank is likely to maintain the current pace of monetary easing because (1) it is due to revise its economic and inflation forecasts at the subsequent MPM in about three weeks' time (30 October) alongside its Outlook Report; and (2) The current share prices and the yen exchange rate has not reached levels that require urgent monetary easing.
However, the question of whether the BoJ will act to ease in the near future (30 October, or at the subsequent few MPMs) has become a closer call, since financial and currency markets have remained unstable since August, on top of which some economic data are coming in below expectations.
In the September Tankan announced by the BoJ on 1 October, manufacturing sector business sentiment worsened, whereas non-manufacturing business sentiment improved, indicating domestic demand is holding up to some degree. The survey also revealed the cycle from income to expenditure remains in place, such as upward revisions for both manufacturing and non-manufacturing FY3/16 capex plans. Turning to the inflation rate, too, the August core CPI (all items ex. fresh food) turned negative YoY (-0.1%), but basically because of the fall in energy prices. Core CPI excluding energy (all items except fresh food and energy) was up 1.1% YoY, with growth actually accelerating from 0.9% in July. The BoJ's baseline scenario of the inflation rate approaching its 2% target as energy prices stop falling while the economy continues to improve through into 2016 has not completely broken down.
"However, we believe there is still the argument about the need for further easing. The picture of economic rebound in Jul-Sep (3Q) hitherto envisaged by the BoJ is the first point that needs revising. Given Jul-Aug Industrial Production fell MoM for two months in a row, 3Q15 real QoQ GDP growth was probably either zero or slightly positive at best. In the BoJ's new forecasts for the economy and inflation rate due to be published on 30 October we believe it is likely to admit either the pace of economic recovery for the time being is milder than its forecast or that economic recovery is coming through more slowly than it anticipated due to the impact of external factors, namely worsening economies in China and other emerging markets", says BofA Merrill Lynch.
The key consideration for further monetary easing will be how the BoJ judges the near-term outlook. Will it maintain its view that the mechanism by which domestic income (corporate earnings, wages) is knocking on to recovery in spending (capex, household consumption) has not broken down, and that the economy is still headed for recovery (albeit somewhat delayed), backed by an ongoing pick-up in the US economy? Or will it conclude the risk of the slowdown in emerging economies spreading to developed nations' domestic economies (including Japan) has increased, and that a period of global economic stagnation will continue? This is a time in which the BoJ's decision-making will be put to the test.
Further, although there is no problem with the BoJ's inflation rate scenario so far, as noted above, it believed the central bank would need to assess the inflation rate implications of the moderate fall in companies' one-year forward inflation forecasts in the September Tankan, and of the roughly 6% rise in the yen's effective exchange rate since China devalued the renminbi benchmark.
There is likely to be a hunt for clues in the BoJ's statement and press conference about how the BoJ assesses points such as 3Q GDP growth, its economic forecasts through into 2016 (estimates not only for Japan, but also for the US and China), and its view on the fall in corporate inflation forecasts and the rise in the yen's effective exchange rate.
