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    Kuroda gives little clues on further stimulus as BoJ keeps policy on hold

    The Bank of Japan delivered no surprises when it announced to maintain monetary policy at current levels at the end of its two-day meeting today. A recent worsening outlook on the world economy and a slowdown in Japan’s largest trading partner, China, had led to some analysts to think that the Bank of Japan would ease policy. But in the statement that followed the decision, the Bank sounded confident that they would be able to achieve their 2% target.

    While the Bank acknowledged that the recent slowdown in emerging market economies has had a negative impact on Japanese exports and industrial production, it cited stronger growth in advanced economies. The statement also pointed out rising business fixed investment and corporate profits, as well as improvements in employment and domestic consumption.

    Inflation remains the main area of concern though as August CPI, excluding fresh food, fell to -0.1% y/y and the headline CPI has dropped sharply to 0.2% y/y after the effect of the sales tax increase faded out of the calculations.

    In the press conference that followed the BoJ’s latest decision, the Governor Haruhiko Kuroda said that he believes they are “halfway to achieving the 2% inflation target”. However, the timing of meeting the target, which has already been pushed back to September 2016, would still depend on oil prices. Most economists see this target as too optimistic as weaker global growth and the continued slump in commodity prices have in recent months increased the downside risks to inflation.

    With signs of industrial output faltering, Japan runs the risk of entering technical recession if third quarter growth comes in negative after GDP contracted by 0.3% q/q in the second quarter. This has raised expectations that the Bank could still expand its quantitative easing program at its October 30 meeting, one year after surprising markets with a big jump in the size of its program.

    The Bank is due to publish its half-yearly report on inflation and economic growth at the October 30 meeting and a sharp downward revision to inflation forecasts could be followed by further monetary stimulus. A decision to increase the size of asset purchases could also depend on whether the government announces any stimulus of its own. Prime Minister Shinzo Abe has already signalled its readiness for further fiscal measures if necessary.

    The yen rose against major currencies after the announcement as investors remain cautious on the possibility of further easing by the central bank. The dollar hit a low of 119.75 yen soon after the decision before bouncing back to just above 120 yen in mid-European session. But the euro stayed near the day’s lows at 134.85 yen, while the pound recovered on strong data to climb to 183.46 yen.

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