Bank of Japan Preview

September 18, 2012

The Bank of Japan Policy Board is meeting Tuesday and Wednesday of this week to decide whether more stimulus should be undertaken.  Market players and government officials will be beyond disappointment if no action is taken. 

The central bank has scant scope to support its economy with interest rate tools.  The overnight money rate target was at 0.5% at the start of the global financial crisis five years ago and has not exceeded that level since September 1995.  It is now in a range of zero to 0.1%.  Because Japanese rates were so low already in 2007, incremental declines since the onset of the global crisis has been much smaller than other central banks allowed.

The loosening of Japanese monetary conditions caused by reducing interest rates has been more than offset by yen appreciation.  For almost a decade and a half, the strongest yen against the dollar was a spike to 79.85 on April 19, 1995.  By comparison, the yen thus far in 2012 has averaged 79.4.  Against the euro, the yen’s year-to-date average has been 101.9, 9% stronger than its full-2011 mean and 67% above its July 2008 record low against the common European currency. 

The last time the central bank’s Asset Purchase Program was expanded was in late April, and the stimulus taken then, a net increase of JPY 5 trillion to JPY 70 trillion was only half as much as an earlier easing done in February. 

Despite quantitative monetary easing, Japanese money and lending growth remain weak, and deflation has returned.

In a variety of ways, it is apparent that Japan’s recovery has lost considerable momentum

  • The composite, manufacturing, and services purchasing manager indices were below the 50 no-change level in June, July and August.
  • The Shoko Chukin index of small business confidence weakened to a reading of 44.8 in August from 46.6 in July and 47.6 in April.
  • The economy watchers index has recorded four straight sub-50 scores including just 43.6 in August.
  • Real household spending posted monthly declines of 1.3% in June and 1.5% in July.
  • A 0.8% on-year decline in total retail sales in the year to July was the weakest in eight months.  Sales fell 1.5% on month after dropping by 1.2% in June.
  • Real GDP growth in 2Q12 was reported initially as +1.4% at a seasonally adjusted annualized rate, down sharply from growth in 1Q, and even that lower figure was revised to show 2Q growth of just 0.7%.
  • Settlements-basis exports fell 6.6% on month and 7.4% on year in July.  Customs export volumes to the EU and Asia were 23.6% and 9.8% lower in July than a year earlier.

Government officials are putting more intense political pressure on the Bank of Japan to ease more forcefully.  The government downgraded its economic assessment this month yet further.  Fiscal policy has run out of scope to stimulate.  In fact, plans are in the works to raise Japan’s sales tax from 5% now to 8% in 2014 and 10% in 2015.  There is consideration for making it 15% by 2015.

The ECB and Federal Reserve eased more dramatically than expected this month.  For the Bank of Japan not to follow suit would invite stronger upward pressure on the yen that Japan can ill afford.  Governor Shirakawa’s five-year non-renewable term as BOJ governor ends next April.  Historically, the governorship was rotated betwee career central bankers and somebody with a Ministry of Finance background.  That pattern was broken with Shirakawa’s appointment.  Both he and his immediate predecessor, Fukui, had a central banking background.  If the BOJ is seen as obstructing government efforts to promote growth and end deflation, a Finance Ministry-friendly candidate could be chosen to follow Shirakawa. 

The case for additional quantitative easing is overwhelming.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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