25 Apr 2016
BoJ in a difficult position to make a move - BBH
Research Team at BBH, suggests that the Bank of Japan is in a difficult position and its aggressive and unorthodox monetary policy has neither slain the deflation dragon nor put the world's third-largest economy on a sustained growth track.
Key Quotes
“The introduction of negative interest rates has not prevented the yen's appreciation, which will lower import prices as well as reduce the value of businesses' overseas earnings and investment income from portfolio investment abroad. Japanese officials may have tried marshaling support for intervention to arrest the yen's rise, but the G7 were not supportive.
Before the BOJ meets, it will likely learn that overall household spending resumed its decline in March after rising in February. Headline consumer prices are expected to slip back to zero from 0.3% in February. The core rate, which excludes fresh food, likely went back into negative territory, while the measure excluding fresh food and energy may have held steady at 0.8%.
The February all-industries report will be released before the BOJ meeting. The Bloomberg survey (median) expects a 1.4% contraction, suggesting the economy continues to struggle. Nor does it look like momentum has improved. The BOJ will also see the March industrial production report. A bounce is expected after a sharp 5.2% decline was seen in February. The underlying signal, from the year-over-year rate, is worrisome. The year-over-year pace of contraction may have accelerated from -1.2% to -1.6%. The preliminary April PMI that was released last week fell to 48, which is a new record low for this three-year-old time series.
According to a Bloomberg survey, 23 of 41 respondents expect the BOJ to take fresh action. There are three areas it can move. First, the BOJ can cut the interest on excess reserves, which currently stands at minus 10 bp. Second, the BOJ can cut interest rate for some loans. The possibility that the BOJ would give negative interest rate loans to banks (like the ECB may if certain conditions are met under its new TLTRO program) is what captured the market's imagination before the weekend. Third, the BOJ can tweak its asset purchase program.
Almost half of those Bloomberg surveyed expect the BOJ to buy more ETFs. A fifth expect more bonds to be purchased. A fifth also expects a rate cut. It is difficult to know how many expect a negative rate lending facility to be announced as idea has just begun circulating. Still, the possibility of negative lending rates is an innovation by the ECB and possibly the BOJ.
When the BOJ moved at the end of January to adopt negative interest rates, it came as a surprise to investors and policymakers alike. Whatever the BOJ does in the week ahead may not catch the market as much by surprise. Still, as of April 19, when the dollar approached JPY109.50 (from JPY107.70 the day before) speculators in the futures market had a record net and gross long yen position.”
Key Quotes
“The introduction of negative interest rates has not prevented the yen's appreciation, which will lower import prices as well as reduce the value of businesses' overseas earnings and investment income from portfolio investment abroad. Japanese officials may have tried marshaling support for intervention to arrest the yen's rise, but the G7 were not supportive.
Before the BOJ meets, it will likely learn that overall household spending resumed its decline in March after rising in February. Headline consumer prices are expected to slip back to zero from 0.3% in February. The core rate, which excludes fresh food, likely went back into negative territory, while the measure excluding fresh food and energy may have held steady at 0.8%.
The February all-industries report will be released before the BOJ meeting. The Bloomberg survey (median) expects a 1.4% contraction, suggesting the economy continues to struggle. Nor does it look like momentum has improved. The BOJ will also see the March industrial production report. A bounce is expected after a sharp 5.2% decline was seen in February. The underlying signal, from the year-over-year rate, is worrisome. The year-over-year pace of contraction may have accelerated from -1.2% to -1.6%. The preliminary April PMI that was released last week fell to 48, which is a new record low for this three-year-old time series.
According to a Bloomberg survey, 23 of 41 respondents expect the BOJ to take fresh action. There are three areas it can move. First, the BOJ can cut the interest on excess reserves, which currently stands at minus 10 bp. Second, the BOJ can cut interest rate for some loans. The possibility that the BOJ would give negative interest rate loans to banks (like the ECB may if certain conditions are met under its new TLTRO program) is what captured the market's imagination before the weekend. Third, the BOJ can tweak its asset purchase program.
Almost half of those Bloomberg surveyed expect the BOJ to buy more ETFs. A fifth expect more bonds to be purchased. A fifth also expects a rate cut. It is difficult to know how many expect a negative rate lending facility to be announced as idea has just begun circulating. Still, the possibility of negative lending rates is an innovation by the ECB and possibly the BOJ.
When the BOJ moved at the end of January to adopt negative interest rates, it came as a surprise to investors and policymakers alike. Whatever the BOJ does in the week ahead may not catch the market as much by surprise. Still, as of April 19, when the dollar approached JPY109.50 (from JPY107.70 the day before) speculators in the futures market had a record net and gross long yen position.”