Preview of Bank of Japan Policy Board Meeting

August 10, 2009

Since its own banking system problems emerged in the early 1990’s, Japanese monetary policy never returned to normal.  The overnight interest rate has not exceeded 0.5% for the past 14 years.  Another unanimous BOJ vote to leave policy settings unchanged is expected overwhelmingly.   The overnight rate target was cut twice in the fourth quarter of 2008 by 40 basis points altogether to 0.1%, where such has stood since December.  That’s a much smaller drop than implemented by other central banks since last autumn.  Bank of Japan officials have also engaged in unconventional credit easing such as the buying of commercial paper and corporate bonds and special liquidity injections to promote bank lending to companies.  At the Policy Board’s last meeting on July 15, officials extended such programs for an extra three months to the end of 2009.  Analysts have been split over whether the termination of such quantitative programs is extended again into 2010, but that is not a decision that has to be made now, and indeed it will not be.

Japan’s economy was badly clobbered in the Great Global Recession (see previous post).  Conditions in Japan have improved but remain weak and fragile.  In a third straight upgrade, the BOJ’s last monthly economic assessment noted pick-ups in exports, industrial production and government investment, but officials also said that profits are weak, investment is sharply lower, and consumption, though exhibiting signs of a pick-up, is generally weak.  Forecasts released by the central bank a month ago penciled in growth of negative 3.4% in fiscal 2009 to March 2010 and positive 1.0% in fiscal 2010 to March 2011.  Core CPI inflation is likely to decline 1.3% this fiscal year and by another 1.0% in FY10.  Since July 15, the Nikkei has climbed 13.5%, 10-year JGB’s have risen 8 basis points, and the yen has lost 2.75% against the dollar.  That depreciation reduces any chance of intervention.

Japanese economic data released since the mid-July meeting have been generally upbeat.  The Shoko Chukin small business sentiment gauge rose 3.1 points to 41.1 in July, well above its quarterly averages of 34.3 in 2Q and 26.7 in 1Q.  Industrial production rose 2.4% in June, 8.3% in 2Q and is expected to be 6.8% higher in July-August than the 2Q level according to survey evidence.  Japan’s manufacturing PMI increased 2.2 points to 50.4 in July, while the services PMI advanced 3.1 points to 45.7.  Core domestic machinery orders leaped 9.7% in June but fell 4.9% in 2Q, while foreign orders for machinery shot up 43.8% in the month but fell 6.2% for the quarter.  Seasonally adjusted exports rose 6.3% in June, cutting the 12-month drop to 37.0% from 42.2%.  Real household spending recovered 3.8% at a seasonally adjusted annualized rate last quarter.  But there were many reminders of Japan’s fragility, for example in labor statistics that showed a rise of two-tenths in the jobless rate to 5.4%, an on-year decline of 2.3% in employment, and a record low reading for the ratio of job offers to job applicants.  Total consumer prices and non-food consumer prices each fell 1.7% in the year to June, which is disturbingly deep into deflationary territory.  But officials have stuck to the view that a major new deflationary phase is not at hand and take comfort from estimates of expected inflation that are more stable than actual prices.  Housing starts fell 32.4% from a year ago.  Money and credit growth remained depressed, corroborating the observation in mid-July of BOJ officials that financial conditions are tight despite signs of some improvement.  The component of the monetary base that is most sensitive to monetary policy, current account balances, increased 63.2% in the year to July, similar to a first-half advance of 66.4% and quite a contrast from a 6.0% decline in 2008.

The Bank of Japan will not be among the first central banks to begin tightening its ultra-loose credit stance.  A rise of the overnight money target before mid-2010 appears doubtful.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.

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