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 Tuesday 20 September 2016

PM Bulletin: BOJ look-ahead

 

 

The US Federal Reserve will announce its interest rate decision tomorrow evening. There’s very little likelihood that the central bank will tighten monetary policy. Not only has recent US economic data been patchy of late, but the Fed has done nothing to prepare the markets for a rate hike. If it announced an increase in its fed funds rate tomorrow then we can expect market turmoil. While the Fed knows it has to push rates up from current levels, it won’t risk cratering the bond and equity markets with a shock move ahead of the Presidential Election.

But before the Fed, we’ll hear the latest announcement from the Bank of Japan (BOJ), and arguably it’s the latter which is of greater importance. First off, there’s very little consensus over what the Japanese central bank may do. We know that Governor Kuroda and his colleagues are under pressure to provide further monetary stimulus but it’s not clear what form this could take. Investors are split over whether the BOJ cuts interest rates further into negative territory, changes the size or make up of its asset purchases, attempts to steepen the yield curve or does nothing at all. Secondly, we know that the BOJ (like its counterparts at the European Central Bank) are anxious for some of the burden for boosting growth and inflation to pass to the government through additional fiscal stimulus. Unfortunately, Prime Minister Shinzo Abe appears to have shot his bolt with the poorly received “28 trillion yen” fiscal package announced at the end of July. Finally, Mr Kuroda’s chief concern is likely to be a negative market reaction to any further monetary stimulus announcement. The BOJ Governor won’t forget how the yen strengthened after he shocked the markets back in January by adopting negative interest rates.

The BOJ has also promised a comprehensive assessment of its current quantitative and qualitative easing (QQE) and negative interest rate policies. If it was honest it would say that its QQE programme hasn’t worked. Unfortunately, the BOJ can’t afford to be honest.

The danger is that the central bank disappoints once again and comes up short in terms of monetary stimulus. If so, this will see the yen continue to strengthen which is exactly what the BOJ is trying to prevent. The stronger the yen, the more difficult it is for Japanese exporters to make sales, and the greater the deflationary pressures. These are the last things that debt-ridden Japan needs right now. No pressure Mr Kuroda.

PM Bulletin

David: But before the Fed, we’ll hear the latest announcement from the Bank of Japan (BOJ), and arguably it’s the latter which is of greater importance.

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Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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