Bank of Japan Preview

July 14, 2010

No changes are anticipated from the monthly meeting of the BOJ’s Policy Board on Wednesday and Thursday.  Because rates were already very low, officials implemented only 40 basis points of cuts to 0.1% in the autumn of 2008.  Outright purchases of JGBs have been kept at 1.8 trillion yen per month since March 2009, and liquidity-supporting measures have fallen far short of the massive quantitative easing employed from 2001 to 2006.

The Japanese government wants the central bank to support growth more actively, and politicians have not hidden that wish.  A moral winner in last weekend’s upper house parliamentary elections, the relatively new Your Party, has been particularly strident in its criticism of the central bank.  So aside from an overall election result that points to greater legislative gridlock and dims chances for a consolidation of the deficit in the medium term, a greater onus would appear to fall upon monetary authorities.

Japan has experienced decent economic growth.  The IMF looks for real GDP to rise 2.4% this year, and the consensus of private forecasters in the July Economist survey penciled in an upwardly revised 3.1% for growth in 2010.  Much of this advance reflects the overhang of a strong first quarter when real GDP grew 4.6% annualized and by 5.0% from 1Q09.

Economic momentum appears to have or be cresting and for some obvious reasons.  The yen is too strong, having risen over 3% since the June meeting of the central bank and stubbornly trading near to 88 per dollar.  The global economic outlook has worsened amid concerns about European sovereign debt, Chinese curbs on bank lending and private investment, and new worries about U.S. housing prices.  Several Japanese indicators were weaker in the past month.

  • The index of leading economic indicators fell to a four-month low of 98.7 in May from 101.7 in April.
  • The composite PMI reading in June of 49.8 was below 50 for the first time in four months.  Sub-50 scores connote contraction.  The services index slid to 47.1 from 47.5, and the manufacturing PMI of 53.9 was 0.8 points lower.
  • In the year to May, housing starts fell 4.6%, real household spending dropped 0.7%, and jobs contracted 0.7%.
  • Seasonally adjusted retail sales dropped 2.0% between April and May.
  • The jobless rate climbed further to 5.2% in May from 4.9% in February.
  • On-year growth in export volumes has slowed from 43.7% in 1Q10 to 39.5% in April and 31.9% in May.  The export orders component in the purchasing managers survey fell back to 56.9 from 59.0.
  • Industrial production edged just 0.1% higher in May, although the 12-month gain was 20.4%.
  • Core domestic machinery orders sank 9.1% in May, trimming previous strength, and foreign machinery orders plunged 17.9% in the month.
  • The Nikkei remains below 10K, and 10-year government bond yields are 8 basis points lower than in mid-June.

Deflation has not been purged from Japan.  The May on-year rates of total, non-energy, and non-food and energy CPI inflation were negative 0.9%, negative 1.2% and negative 1.6%.  Wage earnings ore down 0.2% on year.  Domestic corporate goods prices, which are buoyed by commodity prices, only rose 0.5% over the past 12 months, and export prices showed a 12-month decline of 3.6%.

There is a strong institutional belief in the Bank of Japan that quantitative easing did as much, if not more, harm than good and that deflation will go away if just given enough time.  While growth in 2011 will be weaker than in 2011, it is deemed sufficient to reduce excess supply in Japan’s economy.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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