Bank of Japan Preview: Preparing to Ease Soon
January 25, 2010
The advent of the Bank of Japan’s two-day policy meeting on Monday and Tuesday has seen a rise in market chatter about prospects for more Japanese quantitative easing, if not this week then sometime this quarter. Some of the central bank’s most dramatic policy changes have historically been unveiled either in September shortly before the mid-point of the fiscal year and during the winter quarter which coincides with the end of Japan’s fiscal year. For Japan when there’s a lot of smoke about possible changes in monetary policy, fire erupts more often than not. The fact is that the central bank has failed to eradicate deflation, and that is this nation’s top policy priority.
- Nominal GDP contracted 9.6% in the six quarters between 1Q08 and 3Q09, when it was at its lowest level in 72 quarters going back to 3Q91.
- The personal consumption price deflator posted an on-year drop of 2.9% in 3Q09, a new low for the move and much worse than the 1.8% decline in the year to 2Q09.
- Total and core CPI inflation registered declines of 1.9% and 1.7% in the year to November.
- The latest on-year readings of the domestic corporate goods price index and the corporate service price index are minus 3.9% and minus 2.0%.
After an unscheduled meeting on December 1, the BOJ Policy Board unveiled a 10 trillion short-term lending program to bolster liquidity and said the specific near-term intents of that action are to quicken money and credit growth and to depress the yen. Neither goal was met. On-year growth of M1, M2 and M3 (respectively 1.1%, 3.1% and 2.2% in December) were each lower than in November. More worrisome, bank lending fell 1.0% in the year to December after a 0.2% 12-month uptick recorded in November. Since the last scheduled Bank of Japan policy meeting on December 18, the yen has appreciated 0.6% against the dollar and yuan and by 1.9% against the euro.
One element of policy where further easing is reportedly under consideration is the level of outright JGB purchases undertaken by the Bank of Japan each month. During the whole global financial market crisis, this setting has been changed just twice, rising in December 2008 to Y 1.4 tln from Y 1.2 tln and then three months later to Y 1.8 tln. In all, JGB purchases are now 50% larger than the setting in September 2008 when the world crisis intensified after the failure of Lehman Brothers. This recent easing was considerably more moderate that what Japanese monetary officials implemented in the 14 months between August 2001 and October 2002. In that period, officials expanded outright JGB purchases threefold from a starting point of Y 0.4 trillion to Y 0.6 trillion in August 2001, Y0.8 trillion in December 2001, Y 1.0 trillion in February 2002 and to Y 1.2 trillion in October 2002. A rough 20% rise of the central bank’s balance sheet in 2008-9 was far smaller than what the Fed engineered, with less evidence of deflation than Japan, over the same period.
There have been numerous poor economic readings reported in Japan since the December meeting. The Shoko Chukin small business sentiment index fell to 40.4 in December from 43.0 in November, and the services component slipped below 40.0. The economy watchers index printed at 35.4 in December and averaged 36.9 in the fourth quarter compared to 41.8 in 3Q. Core machinery orders slumped 4.5% in October and by a further 11.3% in November, a sure sign of weakening business investment ahead. Consumer confidence fell to 37.6 in December from 39.5 in November and 40.4 in October. Business sentiment worsened last quarter according to the Finance Ministry’s corporate survey and is expected to be even weaker by March. Japan’s service-sector PMI, where a score of 50 separates expansion from contraction, produced very depressed readings of 42.3 in November and 42.7 in December. The tertiary index fell another 0.2% in November, offsetting strength in industrial production. Housing starts and construction orders again were more than 10% weaker than a year earlier in November. Real household spending in November edged just 0.1% upward between October and November. Supermarket and department store sales in December were each about 5% below year-earlier levels. Despite resilient export demand in the face of yen appreciation and an associated brisk recovery in industrial production, fear has mounted that Japan may slide back into recession.
Fiscal policy support is maxed out. The deficit exceeds 10% of GDP, debt is on its way to 200% of GDP, and the Bank of Japan’s own monthly economic assessment last month downgraded the outlook for public investment.
Politicians from the Hatoyama government are putting heavy pressure on the central bank to ease further. Meetings in February and March have through the years been the ones that central bank officials generally chose to initiate policy changes. Under the current circumstances, they may want to get ahead of the curve, inject a little surprise, and do something further of a concrete nature now. This makes economic as well as political sense.
Copyright Larry Greenberg 2010. All rights reserved. No secondary distribution without express permission.
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