BOJ Likely to Hold Fire, Flag Readiness to Act: Decision Guide

(Bloomberg) -- The Bank of Japan is likely to save its limited policy ammunition for a clearer deterioration of economic conditions when it meets Thursday, just hours after an expected interest rate cut by the Federal Reserve.

That’s the view of a majority of economists surveyed by Bloomberg this month, despite the central bank’s call for a review of prices at the meeting. Since the BOJ’s September gathering, data for the world’s third-largest economy has continued to show domestic demand holding up while a U.S.-China truce on trade has reassured markets. That has weakened the yen and cooled speculation of easing this week, even if the Fed lowers U.S. rates.

Still, a complete lack of action by Japan’s central bank could give the impression it is falling further behind a wave of rate cuts around the world. While the size of the BOJ’s stimulus program is far bigger in scale than those of its global peers, Governor Haruhiko Kuroda’s challenge is to avoid sowing seeds of doubt over his willingness to take more action and the availability of effective ammunition should he do so.

One way the central bank could further demonstrate its readiness to act is by altering its guidance on policy to strengthen or lengthen its pledge to keep rates at rock bottom levels. Alternatively, the BOJ could come up with fresh wording to indicate its strong commitment to add stimulus if needed.

BOJ Is Said to Mull Refraining From Extra Stimulus in October

Were the BOJ to pull one of its major policy levers this week, in what would now be a surprise outcome, it would probably lower its negative interest rate. Since the last meeting, Kuroda has repeatedly referred to lowering short-term rates if action to spur prices is needed.

The BOJ is expected to release its policy statement early afternoon together with a quarterly economic outlook report. Kuroda usually holds a press conference after the decision at 3:30 p.m.

What Bloomberg’s Economists Say

“We think the costs of adding stimulus outweigh the benefits. If there are any changes, they won’t be dramatic -- the BOJ could extend its forward guidance and add more operational flexibility to how it manages yields.”

Yuki Masujima, economist

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What to look for

• Kuroda is likely to emphasize the bank’s vigilance and its willingness to take additional action if needed. The BOJ’s forward guidance currently pledges to keep interest rates extremely low at least until spring 2020. That time frame could be extended, or the commitment strengthened by, for instance, additionally linking the guidance to price momentum.
• Another option is adding language to the policy statement. The bank added a line in July to say it “will not hesitate” to expand stimulus if risks rise. Additional wording could be used to signal the bank’s heightened resolve to continue watching inflation momentum with great interest.
• The tone of the bank’s review of inflation and economic conditions at the meeting could offer an indication of the BOJ’s stance on making its policy more expansionary. The bank’s call in September for the review had fueled expectations of action in October.
• Any remarks on Kuroda’s readiness to lower the negative interest rate, its effectiveness and its drawbacks will come under close scrutiny, after his recent comments suggested this might be his favored easing option.
• The 10-year government debt yield targeted by the BOJ has moved back into a permitted trading range, relieving pressure on the bank to take further steps to prop it up. Kuroda has also talked a lot about a bond yield curve in recent weeks, describing a steeper yield curve as desirable. Bond traders will try to gauge if Kuroda is satisfied by the curve’s recent steepening.
• The impact of an Oct. 1 sales tax hike on the economy is still one of the factors closely tied to the likelihood of BOJ action through its guidance. While economists and policy makers are expecting less damage to the economy than on previous occasions, given a raft of government countermeasures, BOJ watchers will parse Kuroda’s comments on the tax closely.

Policy Recap

• Pledge to keep interest rates extremely low until at least around spring 2020.
• A rate of -0.1% on some reserves financial institutions keep at the central bank.
• Yield target of about 0% 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 ($734 billion) a year is now secondary to controlling interest rates. The actual pace of purchases has fallen to well below 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.

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

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Paul Jackson, Jason Clenfield

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