Bank of Japan Decision-Day Guide: Kuroda Weighs Growing Overseas Risks

(Bloomberg) -- The Bank of Japan is expected to leave rates unchanged on Thursday as risks from trade protectionism, cheaper oil and a higher sales tax cast a shadow over the outlook for the nation’s economy and the prospects of making progress toward 2 percent price growth.

All 49 economists surveyed by Bloomberg see the BOJ keeping its policy settings untouched. Many of them have already pushed back their expectations of when the bank might join its global peers in normalizing policy given the mounting economic risks.

Since the bank’s main policy statement is unlikely to offer many new details, attention will focus on Governor Haruhiko Kuroda’s press conference comments on the risks stemming from trade tariffs, the slowdown in China and recent market instability. The likelihood of inflation weakening again as oil prices and mobile phone charges fall is another pressing issue for Kuroda.

The statement typically comes out early afternoon, followed by a news conference by Kuroda at 3:30 p.m.

Key Points

• The BOJ is looking closely at how overseas risks might hit Japan’s export-reliant economy as it recovers from a contraction last quarter. If demand from abroad weakens sharply that could put the economy on a weaker footing at a time when it needs solid momentum heading into a sales tax hike.
• The falling profitability of Japanese banks is coming into greater focus as market turbulence pushes Japan’s 10-year bond yields closer to zero. While some central bank officials are said to be fine with them sinking below zero, an extended spell there would harden the profit squeeze at commercial banks and their frustration with BOJ policy.
• Dropping oil prices and pressure on Japan’s mobile phone carriers to lower charges suggest inflation will weaken next year, posing a likely question for Kuroda over how the BOJ might respond to a setback in his goal to achieve 2 percent price growth.
• If the Fed’s likely rate path in 2019 shows fewer rate hikes that could strengthen the yen should market jitters remain. A stronger yen would put downward pressure on inflation and hit exporters. Kuroda may want to emphasize his commitment to low rates to keep yen bulls at bay.
• The BOJ has already halved its bond purchases since 2016 and the tapering is likely to continue next year given government plans to issue fewer bonds. That means the bank will have to scale back its purchases even more to avoid driving down yields. Bond traders will be looking for any clue over the likely speed of cuts next year.

Policy Recap

• The BOJ pledges to keep interest rates extremely low for an extended period of time.
• It imposes a minus 0.1 percent interest rate on some reserves financial institutions keep at the central bank.
• It targets a yield of about zero percent for 10-year Japanese government bonds, while allowing a trading range of about 0.2 percent either side of the mark.
• A guideline to increase JGB holdings by about 80 trillion yen a year is now secondary to controlling interest rates. The actual pace of purchases has halved.
• It also has a guideline for increasing holdings of exchange-traded funds by 6 trillion yen a year. The actual level of purchases has varied greatly from month to month, depending on market conditions, and has already risen above the guideline this year.

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

To contact the editors responsible for this story: Brett Miller at bmiller30@bloomberg.net, Paul Jackson, Henry Hoenig

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