Japan prepares for kick-off (of monetary easing)

Following recent announcements of easing from its developed market peers in the eurozone and the US, the Bank of Japan (BoJ) stayed on the side-lines today, keeping monetary policy unchanged.

The short-term policy rate was kept on hold at -0.1%, the 10-year government bond yield target kept at “around zero per cent”, alongside an unchanged ¥80 trillion annual pace of Japanese government bond (JGB) purchases.

However, the Japanese central bank is clearly moving a step closer to easing policy, consistent with our view that the BoJ will cut interest rates by the end of the year.

The central bank added that that it is more concerned about the downside risks to inflation, given slowdowns in overseas economies. It said that it would re-examine economic and price developments at its next meeting, when it will also publish its quarterly outlook report. Back in July, the central bank signalled its readiness to expand stimulus “without hesitation” if needed.

Recent yen weakness a boon for BoJ (and rugby fans)

The BoJ’s two main concerns in need of tackling are downside risks to the external outlook and currency appreciation. The BoJ (and tourists heading to the Rugby World Cup) will be breathing a sigh of relief that the Japanese yen has weakened versus the dollar in recent weeks. While the central bank’s lack of policy action today partly reflects this, it also partly reflects its lack of policy ammunition, given interest rates are already negative alongside a full-blown asset purchase programme.

However, taking a step back, these risks remain elevated. The central bank will be reluctant to loosen monetary policy further, given the detrimental impact on the financial system, but we expect further easing measures by the end of the year. The meeting today clearly opens the door to easing in coming months.

We continue to expect a cut in the short-term policy rate from -0.1% to -0.3% in December as well as an increase in asset purchases. This should double-up as a domestic policy response to soften the blow from the long-awaited consumption tax hike on 1 October.