BOJ July Monetary Policy Meeting Preview

WHEN
Thursday, 11 July 2013

Between 00:00 EST: BoJ Policy Decision and Interim Assessment

Approximately 02:30 EST: BoJ Governor Kuroda Post-Meeting Press Conference

BOJ EXPECTED TO HOLD
The expectation is that the Bank of Japan (BoJ) will maintain its policy stance, given the positive tone of recent economic data and surveys.

Last month, Japan crawled out of its fifth recession in 15 years, with annualised growth coming in at 4.1% in the first-quarter of 2013.

And inflation momentum is also gaining pace. TBoJ’s latest quarterly consumer survey shows that inflation expectations continue to accelerate, with 80% of respondents seeing CPI of 3% within a year.

And this week the BoJ reported that bank lending grew at its fastest rate since July 2009, and M3 money supply is growing at its fastest rate since 1999.

However, the recent service sector sentiment survey highlights, which soured for the third consecutive month, highlights that challenges remain. But the onus to address this is on the Japanese government, not the BoJ.

MAJOR RISKS ARE EASING
With policy set to remain on hold, the focus will be on the BoJ’s post-meeting statement and press conference, as well as the BoJ’s updated near-term forecast for the Japanese economy, where the BoJ is likely to maintain its optimistic view.

Last week, the BoJ raised its economic assessment for eight of the nine regions in Japan; it has now raised its assessment for eight regions or more for two consecutive quarters – the first time in nearly four-years.

Traders will also be keen to hear how the BoJ’s view of macro risk has evolved. In June, the BoJ statement said the Japanese economy “is expected to return to a moderate recovery path,” and risks that the BoJ identified in its June statement have eased.

Although the Eurozone debt crisis continues, European policymakers have, perhaps uncharacteristically, quickly restored calm to both Greece and Portugal. And the talk of tapering by the Fed suggests confidence in the US economic recovery, which is key for Japan. As US rates normalise, and the dollar continues to strengthen against the yen, the risk of yen appreciation – which adversely impacts Japan’s export-focussed corporates – has also minimised.

And despite the recent turbulence seen in bond markets, JGBs have remained relatively stable, with 10-year yields trading in a range between 0.81% and 0.89% since the beginning of June. By comparison, US 10-year yields have traded between 2.07% and 2.74% over the same period.

One area that isn’t so clear is China. The BoJ has expressed concern that overseas shocks, particularly from China, represent the “biggest risk” to Japan’s economic recovery. The recent liquidity shake-down in China had ramifications across Asia, and has the potential to hit trade between Japan and China; and despite the political tensions between the two nations, China is still Japan’s largest trading partner.

OTHER RISKS
The immediate short-term risk on the horizon is the Upper House election on 21 July. June’s local elections in Tokyo bode well for Abe’s LDP party, and opinion polls suggest that the LDP is on course to take the upper house.

An LDP victory would bring political stability to Japan, and allow Abe’s government to push through economic reforms to spur growth, which will add fuel to the so-called Japan ‘reflation-trade’.

Elsewhere, there are other causes for uncertainty. For example, Reuters reported on Tuesday that the Japanese government plans to adopt a different measure of inflation to that of the BoJ. The government intends to use the “core-core” measure of inflation, which strips out energy costs (which has been a key driver of Japanese inflation). This measure of inflation shows Japanese prices to have declined by 0.4% year-on-year.

It has been argued that this may pile more pressure on the BoJ to maintain – and possibly ramp up – stimulus, in order to hit the government’s measure. There are also implications on how this will impact Japan’s proposed consumption sales tax, which is vital to help chipping away at the gargantuan public debt mountain. However, it is unlikely that anything will be set in stone on this front until after the Upper House election on 21 July.

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