Overview
Options for further easing limited
Japan faces headwinds from slowing global growth and uncertainty about the impact of continuing US-China trade tensions, as well as a planned hike to its national consumption tax next month. With rates already in negative territory, the BOJ’s options for further monetary easing are limited.
So it came as no surprise when monetary policymakers decided to forego those limited options on Thursday and keep policy unchanged for the time being, while underscoring in their statement that it is becoming necessary to pay “closer attention” to the chance that the economic could lose enough momentum to achieve the bank’s elusive 2 per cent inflation target.
At the next meeting to be held 30-31 October, the BOJ will review its economic and price forecasts, which implies the central bank could take additional easing measures if needed. If the yen were to appreciate against the US dollar and other currencies for any reason, that might prompt the BOJ to take some action at its next meeting.
When BOJ Governor Haruhiko Kuroda was explicitly asked at his post-meeting press conference whether the BOJ is more open to easing policy than it was at its previous meeting in July, he replied, “Yes, that’s the case. We are more eager to act given heightening global risks.”
Japan's growth slowing ahead of tax hike
Other central banks have mustered further easing steps. A day before the BOJ’s decision, the U.S. Federal Reserve trimmed interest rates by a quarter of a percentage point, a move Fed Chair Jerome Powell said was designed “to provide insurance against ongoing risks”.
Last week, the European Central Bank pushed its interest rates deeper into negative territory and unveiled an open-ended bond purchase program to further push down already low borrowing costs. The yen remained stable after other banks’ easing moves, which took pressure off the BOJ to follow suit.
In October, Japan will raise its national sales tax to 10 per cent from the current 8 per cent, and analysts have warned this could take a deep bite out of consumption. The BOJ will meet for its next rate review on 30-31 October, when it will also issue a quarterly review of its long-term growth and inflation forecasts.
Japan’s economic growth is already slowing ahead of the tax hike. Japan’s exports fell for the eighth straight month in July, and earlier this month, the Japanese government revised its second-quarter gross domestic product figures to reflect lower business spending. Japan’s economy grew at a slower pace of 1.3 per cent in the April-June period, compared with an initial reading of 1.8 per cent, as capital spending rose just 0.2 per cent from the previous quarter - much lower than the preliminary 1.5 per cent rise. The annualized growth rate was trimmed to 0.3 per cent from 0.4 per cent.
The BOJ no longer has a timeline to meet its target of 2 per cent inflation, as core consumer inflation remains stubbornly low. The latest reading of 0.6 per cent was the lowest since July 2017.
Wafer-thin profit margins
Kuroda has said that cutting interest rates further into negative territory is among the bank’s policy options. Under its present yield curve control (YCC) policy, the BOJ guides short-term interest rates toward minus 0.1 per cent and the 10-year Japanese government bond yield to around zero, with the aim of spurring growth through lower borrowing costs.
Any further easing steps are likely to accompany operational tweaks to keep Japan’s yield curve from flattening. Pushing down long- and super-long JGB yields would further erode the already wafer-thin profit margins of Japan’s financial institutions, who are facing critical issues about how to run their businesses in the super-low interest rate environment.
