Bank of Japan to Hold as Virus Spread Abroad Raises Risks: Decision Guide

(Bloomberg) -- The Bank of Japan is seen standing pat on policy, with investors likely to focus on any changes to the bank’s assessment of risks to the recovery amid rising waves of the coronavirus abroad.

All but one of 43 economists surveyed forecast the BOJ will leave its key interest rate and asset purchases unchanged at the end of its meeting Thursday. Analysts see the bank making only slight tweaks to its quarterly forecasts as it weighs the unpredictable course of the pandemic.

The decision comes hours before the European Central Bank is expected to hold fire, but signal more stimulus in the pipeline to combat the potential impact of the virus’s recent spread on the continent. In his post-decision briefing at 3:30 p.m. in Tokyo, Governor Haruhiko Kuroda is likely to stress the BOJ’s readiness to take further action if needed.

BOJ officials see Japan’s recovery still developing roughly in line with the bank’s July projections, with the economy picking up after a record contraction in the second quarter, people familiar with the matter said earlier this month.

There’s little need for the BOJ to move now, they said, because businesses have access to credit and markets have been relatively stable, although investors have become more pessimistic in recent days.

On prices, the bank is likely to consider trimming its inflation forecast due to a government discount campaign for the tourism industry, according to the people. The measure weighed more heavily on consumer prices than some private sector economists expected.

Kuroda has hinted the BOJ is likely to extend the end-date of funding programs adopted to help businesses cope with the pandemic. Most analysts see the announcement coming by January, with only a small minority expecting it Thursday.

What Bloomberg’s Economist Says

“While reflation may be on the backburner for now, the BOJ continues to face serious challenges, with the economy still struggling and recent readings on core inflation below zero.”

--Yuki Masujima, economist

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What To Took For

• Investors will be closely monitoring any shift in Kuroda’s tone on risks to the economy and the financial system given the virus’s surge in Europe and recent market jitters. In its semi-annual report last week, the BOJ said the pandemic has put severe pressure on the banking sector.
• Analysts see the BOJ keeping its inflation forecasts unchanged, but people familiar with the matter said the bank is likely to mull trimming its projection for this fiscal year to reflect the government’s travel discounts.
• If that happens and the BOJ makes no corresponding increase in its forecast for the next 12 months, that would signal a slightly dimmer view of price momentum.
• The BOJ’s virus-fighting measures, including funding programs worth about $1 trillion and expanded asset purchases, expire at the end of March. Any early extension would signal rising concern about funding conditions for companies.
• This month marks the 10-year anniversary of the BOJ’s announcement that it would start buying exchange-traded funds. Kuroda will probably be asked about growing concern over asset price bubbles.

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