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Economists expect the Bank of Japan's decision at its meeting on Friday to be a close call. At the end of the day the central bank will probably decide to ease monetary policy further. It is expected that the BoJ wants to expand the monetary base by 100 trillion yen per year in the future (currently: 80 trillion yen). It will probably mainly buy more government bonds and at the same time shift the focus towards longer-dated paper.
The reason for the forecast of further monetary easing is the weak development of economic growth and inflation compared to the expectations of the Bank of Japan (BoJ). At the last monetary policy meeting the BoJ still said, "Japan's economy has continued to recover moderately, although exports and production are affected by the slowdown in emerging economies".
"We consider the BoJ's view too optimistic. After contracting in Q2, the economy was presumably only stagnant in Q3. Investments and exports, in particular, have recently turned out disappointing. Also, the low wage growth does not exactly underpin the central bank's expectation that its inflation target will come within reach. At the same time, the depreciation trend of the yen has noticeably lost momentum. Taking into account the usual delayed effect of exchange rate movements on the economy, the BoJ may be concerned that the tailwinds it assumes for economic growth and inflation will soon ebb off",says Commerzbank.
The meeting on Friday would be a good opportunity for easing, as the central bank will then update the semi-annual outlook, probably lowering its projections for growth and inflation. Incidentally, the BoJ last expanded the monetary policy dose at the corresponding meeting one year ago. The BoJ increasingly seems to be a prisoner of the markets. Should it fail to act, this could trigger a setback in the markets that would be undesirable from the BoJ's perspective and see its targets recede even further into the distance.
Apparently, the BoJ generally still believes in the effectiveness of its measures. Therefore, an increase in the asset purchases seems to be the most likely measure on Friday. BoJ Governor Kuroda has practically ruled out a rate cut at least for the near future. The new annual purchase volume would correspond to around 20% of GDP.
One risk to forecast is that important releases are coming up this week, with industrial production data due on Thursday and inflation data for September due on Friday. These releases will influence the BoJ's assessment and, in view of the likely close call, they could tip the scales. Should the data surprise to the upside, it is possible that on Friday the BoJ may decide to wait.
"While genuine structural reform would indeed have the potential to give economic growth in Japan a boost, and have for some time viewed the BoJ's expansionary measures with some scepticism. Additional easing would surely cause the yen to depreciate and drive asset prices further upwards, but we expect no notable effect on growth and inflation", added Commerzbank.
