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The Bank of Japan kept its QE program unchanged yesterday. During the policy statement, the central bank cut the assessment on exports and production, citing the slowdown in emerging economies. But it remained confident about domestic demand, describing that business investment has been on a moderate uptrend and private consumption has been resilient.
The BOJ also maintained the core view that the economy is on a recovery path and inflation expectations are increasing from a longer-term perspective. The message from Governor Kuroda at the post-meeting press conference was very similar. And the governor attempted to downplay concerns about the global economy, saying that China is continuing to grow in a stable manner, and a rate hike from the US Fed should be seen as a confidence vote for the US economy.
The deterioration in 2Q GDP came after a strong rise in 1Q. The average growth in 1H15 remained on trend, at 1.7%% (QoQ saar). The labour market conditions have continued to improve, as evidenced by the steady fall in unemployment rate and the modest rise in base wages. Core inflation, excluding both food and energy, has also exhibited a mild rising trend. In addition, thanks to the aggressive monetary easing implemented by the BOJ over the past two years, the yen has depreciated 50% against the dollar and the real effective exchange rate of the yen has fallen to the lowest level over three decades. Given the backdrop that the US Fed is poised to hike rates soon within this year, the BOJ would find it necessary to watch the resultant impact on the FX market before contemplating its next policy move.
The downside risks to Japan's economic outlook remain significant for the near term. Exports and production growth will likely continue to slow in 3Q, in line with the deterioration in the region's manufacturing data. Consumer spending would be weaker than expected this quarter, given the disruption impact from typhoons and floods.
The call for policy stimulus will likely continue to increase in the next few months as the 3Q GDP could fall short of expectations. The most likely outcome is that the government may announce a supplementary budget by the year end, the size of which is estimated to be about JPY 3trn.
