Post-ECB market calm gives Japan central bank room to keep policy steady

Post-ECB market calm gives Japan central bank room to keep policy steady
FILE PHOTO: An industrial port is pictured in Tokyo, Japan, May 23, 2019. REUTERS/Kim Kyung-Hoon   -  Copyright  KIM KYUNG-HOON(Reuters)
By Reuters

By Leika Kihara

TOKYO (Reuters) – The European Central Bank’s decision to hold off on immediate policy easing likely heightens the chance the Bank of Japan will stand pat next week, too, using words rather than action to signal its readiness to fend off growing global risks to the economy.

With solid domestic demand in Japan helping to offset weak exports, many BOJ officials see no imminent need to roll out more stimulus, preferring to save their limited ammunition in case economic conditions deteriorate, sources familiar with its thinking have said.

Still, some officials worry that the BOJ will appear less dovish if its stands pat at a time when U.S. and European central banks are signalling looser policy. That could trigger a spike in the yen that would put further pressure on Japanese exporters.

The ECB likely eased some of that concern at Thursday’s meeting, when it signalled the chance of a rate cut in September but held off on doing so immediately.

For now, with the yen comfortably below the pain point of 100 to the dollar and stock prices stable, the BOJ is seen keeping monetary policy steady at its July 29-30 meeting, analysts say. The dollar was at 108.620 yen on Friday, near a two-week high.

“The ECB didn’t move and the yen’s weakening. I don’t think a lack of action by the BOJ would move dollar/yen much,” said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank.

A stronger test may come later next week, however, when the Federal Reserve is widely expected to cut rates on July 31, a day after the BOJ issues its decision.

Some analysts expect the BOJ to tweak forward guidance – or a pledge central banks make on future policy moves – and commit to keeping ultra-low rates longer than it does now. It is also expected to maintain its massive asset buying programme.

Under the current guidance, the BOJ pledges to keep rates at ultra-low levels “for an extended period of time, at least through around spring 2020.”

Advocates say tweaking the guidance may help dispel market views the BOJ will lag behind the U.S. Federal Reserve and the ECB in expanding stimulus.

While the idea is among options being debated internally at the BOJ, some officials are worried that seeking to appease markets with a tinkering of wording could backfire if it is seen as a sign of desperation, the sources have said.

“Whether the BOJ will tweak forward guidance next week is a close call,” said Shigeto Nagai, a former BOJ official who is currently head of Japan economics at Oxford Economics.

“The ECB strengthened forward guidance, so the BOJ may do so, too. But it’s among the few remaining policy tools, so the BOJ probably opt for the best timing in doing so.”


Even if no change is made to the forward guidance, BOJ Governor Haruhiko Kuroda will likely use his post-meeting briefing to reiterate his readiness to ramp up stimulus if the economy loses momentum to hit the BOJ’s 2% inflation target, analysts say.

Under a policy dubbed yield curve control, the BOJ guides short-term rates at -0.1% and the 10-year government bond yield around 0%. It also buys government bonds and risky assets like exchange-traded funds (ETF) to pump money into the economy.

In fresh quarterly projections to be issued at next week’s meeting, the BOJ will likely trim its inflation forecast for the current fiscal year ending in March 2020, sources say.

Clouds are also hanging over the BOJ’s projection that global growth will rebound in time to make up for an expected hit to consumption from a nationwide sales tax hike in October.

Even BOJ officials wary of acting immediately concede that the central bank may need to ramp up stimulus if global demand fails to pick up quickly enough.

Analysts at ING doubt there will be a meaningful recovery in world trade in coming months and say it could get even worse, pointing to the prolonged U.S.-China trade war and other cyclical factors.

Easing further is no easy choice for the BOJ, which has far less ammunition than the Fed. Japan’s interest rates are already negative and straining financial institutions’ profits.

“With currency rates stable, there’s no reason for the BOJ to use its precious ammunition now,” said Takahide Kiuchi, a former BOJ board member who is now executive economist at Nomura Research Institute.

“Conditions could deteriorate in October, when there’s the sales tax hike. That’s when the BOJ could deepen negative rates and accompany it with an increase in ETF purchases.”

(Reporting by Leika Kihara, additional reporting by Daniel Leussink; Editing by Kim Coghill)

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