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The Bank of Japan (BoJ) is expected to keep the policy rate and yield curve control unchanged at the next monetary policy meeting ending on Thursday, October 31. However, it is set to make great efforts to highlight its willingness to act if needed, according to the latest research report from Danske Bank.
The economy is still solid, which calls for patience considering the limited tools left at the BoJ's disposal. VAT-hike and global slowdown pose a risk that the economy falls back into deflation.
The new projections for GDP and inflation are likely to be revised down, the report added.
A strengthening of the JPY of about 4 percent y/y poses a headwind for exporters along with the global slowdown, which has caused a decline in demand for especially semiconductor manufacturing parts. Even so, export volumes were up 2.7 percent y/y in September and GDP-growth is expected to be around 1.5 percent q/q annualised in Q3.
The global economic outlook is a big risk for Japan. The US-China trade war is key, with the US and China as the two most important trading partners but the course for global monetary policy could be just as important.
With an economy running on the safe-haven JPY, Japan is sensitive to the decisions of the Fed, the ECB and PBoC.
However, BoJ also faces the risk that the global monetary policy response is not sufficient to curb a threatening downturn in economic activity in which case we have a global recession and an unsustainable situation for Japanese exporters who face declining global demand enforced by further JPY strengthening causing a deterioration of competitiveness.
"We continue to weigh the structural appreciation pressure (as inflation remains extremely weak) against cyclical trends, which at least in recent months have been in favour of a weaker JPY. We currently target 107 short term," Danske Bank further commented in the report.
