BOJ Decision Guide: Focus Is on Inflation Outlook, Kuroda's Views

(Bloomberg) -- With inflation sinking and side effects piling up, Governor Haruhiko Kuroda’s views will come under scrutiny after the Bank of Japan’s first policy meeting of the year on Wednesday.

All but one of 50 economists surveyed by Bloomberg expect the central bank to leave its policy settings unchanged. Most also expect it to cut its inflation outlook yet again, including a significant downgrade to the fiscal year that starts in April, when it releases its quarterly report.

Ahead of a policy meeting by the European Central Bank on Thursday and the Federal Reserve next week, the focus in Tokyo will be on Kuroda’s take on inflation and risks. For one, he will be expected to explain why more stimulus isn’t needed even as private economists forecast that headline inflation will turn negative this year.

BOJ Decision Guide: Focus Is on Inflation Outlook, Kuroda's Views

Kuroda will almost surely say that the factors weighing on inflation -- a plunge in oil prices, cuts to cell phone and education fees -- are temporary and that underlying momentum toward the BOJ’s 2 percent target remains intact.

Yet any comments from Kuroda on the buildup of risks in the financial system or the costs of prolonged easing might be more illuminating. In recent months, Kuroda has highlighted the need to weigh the benefits versus the costs of prolonged extreme stimulus, even noting that large-scale easing to defeat deflation is no longer the most appropriate policy for Japan.

Hawks and Doves

After nearly six years of stimulus, most BOJ watchers think the central bank is looking for an opportunity to slowly normalize policy -- even though a majority also think 2 percent inflation is unattainable. But with signs that global growth is slowing, and a sales-tax increase scheduled for October, only a small minority expect any such moves this year.

And with inflation falling, and many predicting a stronger yen, Kuroda will likely want to strike just the right tone -- not so hawkish that he raises expectations of normalization, but not so dovish that it begs the question about additional easing.

The policy statement and economic projections are released together, typically around midday local time, with Kuroda’s news conference following from 3:30 p.m.

What to Watch

  • Given the recent turmoil in financial markets and slowing global growth, many are questioning whether the BOJ has the tools to respond to a shock or even a mere recession. Kuroda’s views on external risks and possible BOJ responses will be another area of focus.
  • Sinking inflation could cause extreme doves on the BOJ policy board to agitate for further easing. So far policy divisions have been limited to two dissenting votes. But they could heat up if the reflationists think the BOJ’s 2 percent inflation target is being abandoned.
  • The BOJ often raises its economic growth forecasts when it cuts its inflation outlook. This time it can cite Prime Minister Shinzo Abe’s measures to counter the sales-tax hike. Still, the China slowdown and trade tensions remain key risks.

What Our Economists Say...

"The Bank of Japan is set to keep its policy settings unchanged on Wednesday," Bloomberg Economics’ Yuki Masujima wrote. "Even so, discussions are likely to be lively, as the board faces a combination of slowing inflation and growth, and increasing external risks."

See JAPAN PREVIEW

Policy Recap

  • Pledge to keep interest rates extremely low for an extended period of time.
  • A rate of -0.1 percent on some reserves financial institutions keep at the central bank.
  • Yield target of about zero percent for 10-year Japanese government bonds, with a trading range of about 0.2 percentage point on either side of the mark.
  • A target of increasing JGB holdings by about 80 trillion yen a year is now secondary to controlling interest rates. The actual pace of purchases has fallen to less than half that rate.
  • A guideline to increase holdings of exchange-traded funds by 6 trillion yen a year. Actual purchases vary widely from month to month, depending on market conditions.

©2019 Bloomberg L.P.