On the back of faltering economic growth and diminished expectations for inflation in the period ahead, the Bank of Japan (BOJ) looks set to deliver even greater amounts of monetary policy stimulus later this week.
That’s the view of Tom Kenny, an economist at ANZ, who suggests the BOJ will downgrade its inflation forecasts and push back when it expects to achieve it medium-term 2% inflation target when it begins its two-day monetary policy meeting tomorrow.
That will set the scene for not only a reduction in interest rates but also an expansion of asset purchases when it announces its monetary policy decision on Thursday.
“Key for policy, from the central bank’s perspective, is the inflation view,” says Kenny. “The BOJ has in recent forecast updates pushed back the timing of when it expects to achieve its 2% inflation objective. A theme we expect to continue this week.”
The chart below, supplied by the ANZ, reveals the evolution in the BOJ’s inflation outlook from the beginning of last year. Although it always projects that inflation will return to 2%, the pace of that return has been constantly pushed further into the future.
According to ANZ’s GDPNow estimate, it’s likely that the Japanese economy contracted by a small margin in the first three months of the year, something that Kenny suggests will lessen inflationary pressures moving forward.
“This would be the second successive quarter of negative growth, implying Japan was in a technical recession,” says Kenny. “Much of the weakness is owing to subdued household spending. Negative growth, or even positive growth that is below potential, will lead to a larger negative output gap. Such a development means less inflation pressure.”
Along with a misfiring economy, Kenny also notes that inflation expectations among Japanese consumers and businesses have been weakening of late, creating unfavourable conditions for an acceleration in wages growth.
Recent developments suggest inflation expectations are sagging,” he says. “The Shunto wage outcomes have been subdued and are running below last year, and high frequency price data (daily and weekly) show price momentum is waning.”
Shunto wage outcomes refers to wage negotiations between unions and employers that occur in the Japanese spring.
In tandem with recent strength in the Japanese yen, something that has appreciated 8.6% against the US dollar since late January this year, Kenny believes that the conditions are in place to see the BOJ deliver an aggressive policy easing on top of those already announced in recent years.
“We expect additional easing to be in the shape of more asset purchases (JGBs and ETFs) and a further cut to the negative deposit rate,” says Kenny.
He also suggests the bank may consider a measure to alleviate the pressure on bank profitability from negative rates and a flatter yield curve.