In focus

Japan heads for recession despite BoJ action

It comes as no surprise that the Bank of Japan (BoJ) has joined other central banks across the world, including the US Federal Reserve (Fed),  in easing policy to fight the coronavirus. Governor Kuroda had already issued an emergency statement and various reports has suggested the BoJ were likely to increase purchases of equities through Exchange Traded Funds (ETFs).

This is essentially what we got. The upper limit of annual purchases of ETFs was doubled to ¥12 trillion. Limits were also raised on the purchases of real estate investment trust (REITs), commercial paper and corporate bonds.

The fall in the TOPIX on the announcement showed that investors were rightly underwhelmed. Central targets of asset purchases were left unchanged as well as interest rates and forward guidance, pointing to no major long-term change in overall monetary policy. Ultimately, this was an announcement of more quantitative easing (QE) – a further expansion of the BoJ’s balance sheet that is already larger than the country’s GDP.

This monetary policy response confirms investors doubts that there is little monetary policy ammunition left for the BoJ. Of course, Governor Kuroda stressed that is was still possible for interest rates to be cut further into negative territory, but action today showed the reluctance to do so. Its decision to announce policy only a few days early was perhaps a move to co-ordinate the announcement with the Fed, possibly with the view that this would help markets stabilise.

Reflecting concerns around corporate financing, the BoJ also announced measures to provide loans against corporate debt as collateral at an interest rate of 0% with maturity up to one year. This is shortly after the Japanese government announced an additional 0.3% GDP of financing measures; such as loans to struggling SMEs.

Elsewhere, schools and museums have been closed but Japan is yet to declare a national emergency. The government has also announced 0.1% GDP in spending on measures such as subsidising parents who need to take time off work to look after children, funding for vaccine development and more test kits.

The Japanese economy was already looking vulnerable following a 7.1% quarter-on-quarter annualised contraction in the fourth quarter. The steps taken by the BoJ today will have little impact on the economy and so we maintain the view that the coronavirus will tip Japan into recession.