“I don’t know what they want from me /
It’s like the more money we come across /
The more problems we see.”
In case you need a refresher on ’90s pop culture, those are lyrics from “Mo Money Mo Problems” by the Notorious B.I.G.
But they also inadvertently explain the predicament the Bank of Japan is facing ahead of its policy decision on Friday, as a group of Credit Suisse analysts suggested in a note on Wednesday.
“The Notorious BOJ,” as the team called the central bank in their note, has been pursuing aggressive easing since 2013. However, inflation is still far below the bank’s target and consumer spending hasn’t greatly improved. Plus, the yen started strengthening again in 2016.
As such, there has been pressure on the bank to pursue even more aggressive measures. And this has brought up a whole new slew of questions such as 1) Will the bank actually do this? and 2) When will the bank do this?
(Hence the “Mo Money, Mo Problems” connection — more stimulus has now caused more problems for the bank.)
“The market remains on tenterhooks waiting to see what type of monetary policy easing the BOJ can and will deliver,” the Credit Suisse team, led by Shahab Jalinoos, wrote.”Until now, countless rounds of monetary easing have not been deemed sufficient to counter Japan’s economic malaise.”
The WSJ reported earlier that BOJ Governor Haruhiko Kuroda said the bank could go for more easing if necessary, and that he noted there were benefits to pursuing monetary easing and fiscal stimulus at the same time.
However, the WSJ also reported that other bank officials “are signalling a reluctance to act,” given that the bank is already so accommodative and that the current global environment could be a bit shaky in the aftermath of the Brexit vote.
Notably, Japanese Prime Minister Shinzo Abe threw another curve ball on Wednesday with his announcement of a huge 28 trillion yen ($265 billion) fiscal package. The announcement came earlier than expected, and, interestingly,
several analysts suggested to Bloomberg News it might be an attempt to put pressure on the central bank to act.
For the most part, analysts think the bank will do something this week. A Bloomberg survey conducted July 15-22 found that 32 out of 41 analysts forecast the BOJ will expand monetary stimulus — the highest percentage of respondents in any poll in over the last three years.
Moreover, in a note to clients published on Monday (so, ahead of today’s announcement), a UBS team led by economist Daiju Aoki argued (emphasis added):
For the BOJ, we believe the timing of additional easing most effective for influencing the markets and the economy would be to synchronise with the announcement of a large supplementary budget by the government. Following the upper house elections, the government aims to draw up economic countermeasures before the end of July. We see an increased probability of the BoJ taking action at the 29 July monetary policy meeting. If this occurs, the BOJ is likely take action then. Our main scenario envisages a 10bps IOER cut and a ¥10trn expansion in quantitative and qualitative easing. If the government and the BOJ act together, we believe it might lead to a recovery of market expectations for Abenomics. […]
Still, not everyone’s completely sold. Capital Economics’ Marcel Thieliant argued in a note that “today’s [fiscal stimulus] announcement reduces the chances of further monetary stimulus being introduced this week but we still think it more likely than not.”
In any case, stay tuned for Friday. It could get interesting for the “The Notorious BOJ.”
The yen is weaker by 1.0% at 105.71 per dollar as of 2:39 p.m. ET.
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