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 Thursday 28 July 2016

PM Bulletin: BOJ look-ahead



Yesterday’s Federal Reserve meeting went pretty much as expected. The Fed held off from hiking rates while the accompanying rate statement managed to be all things to all people. That is, anyone who wants to believe that the US central bank is prepared to hike rates in September can point to the FOMC’s comments on the “strengthening” US labour market and diminishing near-term risks to the economic outlook. Others could point to the FOMC expressing caution over the inflation outlook and noting diminishing job gains in June as reasons for the Fed to hold off from tightening until December or beyond. The sell-off in the dollar and bounce in precious metals suggests that it was the dovish take that prevailed market-wise.

But now we turn to the Bank of Japan’s (BOJ) meeting which is unarguably the more important event. The expectation is that the BOJ will announce further monetary stimulus to coordinate with the 28 trillion yen ($265 billion) of fiscal stimulus that Prime Minister Shinzo Abe promised yesterday. Mr Abe’s announcement was something of a surprise as he wasn’t expected to reveal anything about the government’s spending programme until next week. The feeling is that by coming out early with a stimulus package which, size-wise, appears to be at the high end of expectations, Mr Abe has put pressure on the Bank of Japan and its governor Haruhiko Kuroda to come up with something equally accommodative on the monetary side.

Analysts are all making their predictions over what form the BOJ’s monetary stimulus may take. Some expect the central bank to push its Deposit Rate deeper into negative territory. It was back in January this year that the BOJ adopted a negative interest rate – just 10 days after Governor Haruhiko Kuroda said it wouldn’t happen. But others feel that stimulus is more likely to come from increased purchases of Japanese Government Bonds, Real Estate Investment Trusts and Exchange-Traded funds. Below is a chart from BofA Merrill Lynch which shows the results of its fund manager survey:

PM Bulletin

A fair number of respondents feel that the BOJ may announce its intention to embark on “Helicopter Money”, where the central bank effectively funds the government directly. However, this would require a change in legislation. In addition there are a number of policymakers who consider “Helicopter Money” a step too far which could ultimately trigger hyperinflation.

But what is of more interest is the comparatively large number of fund managers who think the BOJ will sit on its hands this time round. Looking at the sell-off in the USDJPY over the last couple of days it also looks as if investors feel the same. This could just be book squaring ahead of the announcement tomorrow morning. But it also could be that investors are hedging themselves in case the BOJ fails to deliver on their monetary policy response to Prime Minister Abe’s promise on infrastructure spending. In a nutshell, if the BOJ does nothing tomorrow then we can expect the USDJPY to slump and head back towards 100. If it announces a big shock-and-awe easing package then 110 will be the first upside target.

We will know the outcome of the BOJ’s deliberations by the time European markets open tomorrow. Needless to say, there’s plenty of scope for market disappointment, particularly if the BOJ decides that Shinzo Abe’s proposed fiscal stimulus gives it the perfect cover to hold off from meaningful action. But unless the BOJ does absolutely nothing, it will be virtually impossible for us mere mortals to quickly analyse and calculate whether the central bank’s stimulus is market positive or negative. So it will be the USDJPY which will tell us whether the central bank has met, missed or exceeded expectations.

David: We will know the outcome of the BOJ’s deliberations by the time European markets open tomorrow.


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Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin

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