Bank of Japan Preview

December 19, 2011

The Bank of Japan’s monthly two-day policy meeting starts Tuesday.  The final scheduled Board meeting of the calendar year is usually a quiet affair.  Just twice in the last ten years, 2001 and 2008, was monetary policy changed at the December meeting, and both occasions involved adoption of an easier stance.  That continues to be the policy bias.  Policy in 2011 was relaxed in March, June, August, and October.  The overnight uncollateralized interest rate target has been a range of zero to 0.1% for the last fourteen months, and Japan’s discount rate hasn’t exceeded 0.5% since September 1995.  At the time of the last increase in the central bank’s asset purchase program, such was raised to JPY 55 trillion from JPY 50 trillion, and one of nine policymakers, Miyao dissented in favor of raising the ceiling to JPY 60 trillion.  The Board voted unanimously at last month’s meeting to keep its settings unchanged, but officials cut their economic assessment then, observing growth depressants from the elevated yen, slower foreign demand, and flooding in Thailand.  Intervention by the Ministry of Finance to contain upward pressure on the currency was the most in a single operation ever, totaling almost $120 billion.

Japanese real GDP growth of  5.6% at an annualized rate between 2Q11 and 3Q11 grossly overstates the health of the economy.  GDP was still 0.7% smaller than a year earlier, and the average real growth rate during the ten years between 3Q01 and and 3Q11 was all of 0.7% per annum.  For two decades, Japan’s economy has exhibited little resilience in the face of external shocks, whether in the form of the 1995 upward spike of the yen, 1997 sales tax hike, the 2007-8 global financial market struggles, or this year’s Sendai earthquake.  Many economic indicators depict trouble.

  • Net exports and inventory building, which have taken a subsequent turn for the worse, accounted for three-fifths of third-quarter economic growth.  The seasonally adjusted customs trade deficit widened to JPY 458 billion in October from JPY 97 billion in September, and export volumes sank 4% between September and October.  Foreign machinery orders in October were 6% lower than their 3Q mean level.
  • Consumer confidence slid further to a reading of 37.5 in November from 38.6 in October. 
  • The Shoko Chukin small business sentiment gauge worsened to 45.8 last month from 46.4.
  • The jobless rate jumped 0.4 percentage points in October, and there were 0.3% fewer jobs than a year before.
  • Core private machinery orders, a leading indication of future business capital spending, slumped by 14.5% between August and October. October from JPY 97 billion in September.
  • The economy watchers index fell to a 45.0 reading in November, a six-month low, from 45.9. 
  • The index of leading economic indicators is pointing to weaker activity ahead. 

The Nikkei has lost 2.0% since the November policy meeting, 17.4% since July 27 and 78.7% since the end of 1989 some 22 years ago.  The ten-year Japanese Government bond yield closed today at a lowly 0.97%.  Such has averaged 1.13% so far this year, 1.29% since the start of 2008, and 1.42% since 1998. 

It’s very likely that the Bank of Japan will be again expanding quantitative easing sometime soon, and it could happen as soon as Wednesday.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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