The Bank of Japan probably won't do anything until July

On January 28, the Bank of Japan shocked the global markets by introducing negative interest rates. In a 5-to-4 vote, BOJ members agreed to charge financial institutions an interest rate of -0.1% for excess reserves parked at the bank.

The BOJ’s next policy meeting takes place March 14-15, but that likely won’t include an announcement of more easing, Barclays says. The investment firm has pushed back its expectation of more BOJ easing until the July meeting. Barclays cites three reasons for delaying the next round of easing:

  1. Japan’s stock market has stopped falling. The Nikkei has rallied 13% since February 12.

  2. The recent G20 meeting “discouraged competitive currency devaluations.” Additionally, finance chiefs from the Group of 20 said they would “consult closely” in regards to the foreign exchange market.
  3. The BOJ needs more time to monitor the impact of negative rates on the behaviour of financial institutions and the economy. The policy was introduced just over a month ago so the policy hasn’t yet had the chance to work its way through the system.

So why July? Barclays says the Japanese economy is underperforming the BOJ’s expectations. The bank projects the economy will contract at a seasonally adjusted annual rate of 0.1% in the first quarter, which is far lower than the 1.4% that the consensus is expecting. The economy contracted at an annual rate of 1.4% in the final quarter of 2015.

Additionally, Barclays says core CPI looks likely to “fall more steeply y/y toward June-July,” and that the central bank is likely to lower its core CPI outlook in either the April or July review and push bank its forecast for arriving at its 2% target.

As for how the BOJ’s easing will be implemented, Barclays believes it will come in the form of further rate cuts. The firm sees the rate of interest on excess reserves (IOER) being lowered to -0.30% from -0.10% and for “quantitative and qualitative monetary easing to be retained.” This should shift Japan’s entire yield curve lower, the firm concludes.

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