The Bank of Japan will announce its latest policy decision on Tuesday. There is no set time for the announcement, but they are usually made slightly before 03:00 GMT. As the BoJ’s peers have begun cutting or are planning to cut rates, pressure is growing on the central bank to ramp up its already massive stimulus program. But with few tools left at their disposal, policymakers are likely to be hesitant before approving a new round of easing. Making matters worse for the BoJ is a stronger yen as its major rivals struggle under the weight of the slowing global economy.
Inflation far below BoJ’s 2% target
As inflation (as measured by the core consumer price index) falls to two-year lows, the BoJ is at risk of facing another delay to the timing of when it expects to hit its price goal. Core CPI moderated to 0.6% year-on-year in June, far below the 2% target, raising questions about the effectiveness of the BoJ’s unconventional policies.
However, with growth slowing in Japan’s main trading partners, thus, acting as a big drag on the country’s exports, and inflation in other parts of the world also remaining low, the prospect of either growth or inflation rebounding sustainably anytime soon is remote. This potentially leaves the BoJ with little option but to increase monetary stimulus in the coming months.
Policymakers likely to be undecided at July meeting
BoJ Governor, Haruhiko Kuroda, has repeatedly pledged to maintain “powerful monetary easing” until inflation has reached 2%. Speaking recently in Washington, Kuroda struck a caution tone, saying “We will carefully examine various risk factors, in addition to developments in economic activity and prices as well as financial conditions, and weigh the benefits and costs of the policy effects”. The comments suggest that while policymakers are very concerned about the negative global developments, the Bank is not yet convinced whether further easing is needed, at least not just yet.
With no immediate urgency to act and concerns about the side effects of a prolonged period of ultra-loose monetary policy, the BoJ is expected to stand pat this month and put off any decision until the planned sales tax hike has come into effect in October so it can assess the impact on household and business spending. The last time the government raised the sales tax in 2014, the economy slipped into a recession and there are worries the same could happen again this time round.
Stronger yen to keep BoJ on edge
But there’s still a chance the Bank could decide to provide more stimulus sooner depending on the scale of the policy easing by the Federal Reserve and European Central Bank, as well as their impact on the currency markets. The Fed is expected to cut rates by 0.25% next week, while the ECB has signalled that all options remain on the table.
Should the BoJ decide to sit out the current easing cycle by world central banks, the yen is likely to extend its steady uptrend that began in early May. That could possibly prompt the BoJ to tweak its forward guidance as early as next week so as to alleviate some of the upside pressure off the yen.
Dollar/yen could firm to around the 108.92 mark – the 38.2% Fibonacci retracement of the April-June downleg before eyeing the 50% Fibonacci at 109.58 if the BoJ surprises with strong hints of more stimulus. However, should Kuroda stick to familiar language, there’s likely to be limited reaction in the forex market and dollar/yen could seek support near the 23.6% Fibonacci at 108.10.
