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Analysts at UOB Group explained that the spectre of normalisation lingers on

Key Quotes:

“Notwithstanding the latest news reports, we (and most economists covering BOJ) expect BOJ to leave monetary policy unchanged in the upcoming July monetary policy meeting (MPM). Inflation in Japan remains disappointingly low and still far away from its 2% inflation target (June headline CPI inflation at 0.7%y/y while core inflation is slightly higher at 0.8%, core-core inflation is much lower at 0.2% in June). Thus, it was not surprising when the BOJ removed the timeframe to achieve the 2% price target during the April (2018) MPM and further downgraded its view on CPI inflation to a range of 0.5% to 1.0% in its June MPM (compared to its April’s view of moving around 1%).

The other factor is the increasingly difficult US trade policy developments, specifically the potential US tariffs on autos and auto parts which is a key downside risk to Japan’s trade outlook in the near term and could spark retaliatory tariffs from the Japanese government. Japan had previously refrained from responding to the US over the steel and aluminum tariffs, but it is unlikely to stay silent on cars. Thus, this could be a very “inconvenient” time for BOJ to normalize or tweak policy as the subsequent strengthening of the yen could add more pain to Japanese exporters.

Beyond next week’s BOJ MPM, the markets may still re-ignite speculation about “BOJ normalization” in the medium term unless the BOJ finds a way to reassert its “easy monetary policy” credentials which has not been helped by the fact that the projected annual pace of JGB buying remains well off the official target of JPY80trn per annum. From JPY58trn at end2017, the pace eased to a low of JPY42.9trn (as of 30 Jun 2018). And while the pace has since stabilized and hovered just below JPY 44trn in the weeks of July, it is still well off target.

The next BOJ MPM takes place on 30 and 31 July with the monetary policy decision due on 31 July (typically between 11am and 2pm SG time) followed by Governor Kuroda’s press conference (2:30pm SG time). The decision will be accompanied by the release of the latest Outlook Report (known as The Bank’s View).”