Bank of Japan Fails to Change Policy

October 7, 2015

Monetary officials had not been expected to enhance quantitative stimulus at this week’s Board meeting.  Markets have instead been focused on the second October meeting on the 30th, wondering if lightning might strike twice.  Two meetings are held in April and October, the second being meant for the unveiling of a comprehensive review of economic growth and inflation trends and prospects.  Last October 31st, officials used that opportunity to amplify the degree of quantitative stimulus substantially.  The ultimate goal of securing and maintaining 2% core CPI inflation remains elusive, and several recent growth measures have been disappointing.

  • Real GDP unexpectedly contracted 1.2% at an annualized rate between 1Q and 2Q.  Real GDP in the eight years between mid-2007 and mid-2015 grew just 0.1% per annum, embodying four different recessions as defined by episodes of at least two consecutive declines in GDP.
  • Japanese industrial production fell 0.5% in August, 1.5 percentage points below street forecasts of a 1.0% gain.  Output was only 0.2% greater than a year earlier.  METI downgraded its assessment of IP to “has weakened” from “fluctuating indecisively.”
  • On-year growth in retail sales slowed to 0.8% in August from 1.8% in July and 2.9% in 2Q15.
  • Global export volume was 4.2% smaller in August than a year earlier (and down 9.2% against China).  Export values fell 0.2% on month in July and 0.4% in August.  The export order component of
  • Real labor cash earnings between August 2014 and August 2015 grew merely 0.2%.
  • Small business sentiment has been below the 50 threshold between optimism and pessimism for at least a year.
  • The index of leading economic indicators fell to a 15-month low in August.
  • Japan’s composite purchasing managers index printed in September at 51.2, below the third-quarter average  of 51.9, and little different from the second-quarter mean of 51.3.
  • Construction orders in August were 15.6% lower than in August 2014.
  • The Bank of Japan quarterly Tankan survey of corporations revealed perceptions of more intense disinflation.
  • The jobless rate edged up 0.1 percentage point in August, and jobs growth amounted to just 0.3% over the past year.

After meeting for five hours six minutes on Tuesday and Wednesday, a statement released by the Policy Board embraced the the appropriateness of the current stance enthusiastically.  For the past year, officials have been maintaining a virtual zero interest rate policy and growing the monetary base by 80 trillion yen a year via long-dated JGB purchases of similar size.  Officials expect the economy to recover moderately, maintain that the underlying price trend continues to improve, and predict that inflation will rise to the 2% goal sometime in the first half of next fiscal year, that is by September 2016.  The Bank’s message of satisfaction with status quo and preference for continuity over change is reinforced by the fact that the statement has only one significant change for September’s statement, which says that business sentiment has stayed generally favorable but adds that somewhat cautious developments can be observed in some areas. 

At the subsequent press conference, Governor Kuroda dug in his heels even further against critics urging and predicting another enhancement of quantitative easing (QQE) at the second October meeting.  Kuroda maintained that QQE continues to yield progress and that officials are looking past the transitory negative impact of lower oil prices since mid-2014.  He asserted, too, that a cut in interest rates on excess reserves held at the BOJ is absolutely not under any consideration. 

I tend to think lightning will not strike twice when the Board meets at end-October.  This is going to be a committee decision, so one should not count the chickens before they are hatched.  Moreover, one thing is for sure, and that is the need to revised projected growth and inflation lower than those made in July.  At that time, projected growth in fiscal 2015 was revised to 1.7% from 2.0% projected back in April.  Projected core inflation, which includes energy, was revised down by 0.1 percentage point each to 0.7% this fiscal year, 1.9% in fiscal 2016 and 1.8% excluding a consumption tax hike in fiscal 2017.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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