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    Japan: Mixed case for BoJ easing - Scotiabank Sandeep Kanihama

    Research Team at Scotiabank, suggests that while the Federal Reserve takes to the sidelines and the Bank of England explores contingency policies, one major central bank has begun to talk a little tougher — or at least one or two of its officials and advisors have.Key Quotes“The lead-up to Thursday’s Bank of Japan meeting became more interesting in the wake of comments by BoJ Deputy Governor Hiroshi Nakaso who remarked that “Overcoming deflation as soon as possible through decisive monetary easing is absolutely essential to returning Japan’s economy to a sustained growth path.” He also remarked that the April pause “does not preclude additional monetary easing if necessary.”It’s possible, however, that the BoJ could keep its powder dry again given decent Q1 economic growth and ahead of the uncertain global market effects of the following week’s UK referendum. The BoJ’s negative rate policy has been deeply unpopular in Japan across both high saving households and a major bank that is threatening to drop out of the country’s 22 primary dealers. Further easing could complicate the political backlash for the government on the path to the upper-house election at the end of next week.Pushing out plans to hike the sales tax also lessens downside risk to growth next year. Possible ways of easing are similar to prior speculation including further cuts to the negative rate on excess reserves, possibly introducing an ECB-style funding for lending program that cuts borrowing costs for banks to the same negative rate in order to mitigate the negative effects of negative rates on reserves, and increased purchases of exchange traded funds.Nevertheless, if there is a case for easing, it lies in the fact that Japan’s inflation rate continues to weaken although entirely on the headline CPI reading as a soft core reading is stabilizing of late. Further, recall that the national inflation numbers lag fresher figures for the city of Tokyo where the May reading fell further to -0.5% y/y and 0.5% y/y excluding food and energy. It remains doubtful, in our opinion, that further monetary easing would be sustainably successful in raising Japan’s inflation rate.A country with high import propensity is vulnerable to higher import prices on the back of the likely concomitant weakening in the yen. In the absence of faster wage growth or easier access to credit, households respond to yen weakening by spending more on what they have to — often imported food and energy — and less on what they don’t have to — discretionary items. Thus, the second-round effects of policy easing can be disinflationary as households move to balance their budget constraints. Regardless, the BoJ continues to fight this argument through what is arguably fruitless policy easing.”


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