* Bank of Japan (BoJ) as expected did not announce any policy
changes in connection with today's monetary meeting. With the
economy recovering again and currently no severe appreciation
pressure, it will be status quo for the rest of the year. The zero
interest rate policy will be maintained and BoJ is expected to
continue to purchase assets until June/July.
* Unlike most other countries inflation in Japan is still
substantially below the central bank's inflation target and for
that reason there is less pressure to respond to the recent
increase in commodity and energy prices. Interest rate hike not
expected until Q4 2012.
*Details*
As expected BoJ did not announce any policy changes in connection with
today's monetary meeting. The key policy rate, which is the target for
the O/N interest rate on the interbank market, was left unchanged at
0-0.1%. Also in line with expectations, BoJ did not announce any
further expansion of its JPY35trn QE programme. BoJ's QE programme
currently consists of a JPY30trn fixed rate funds supplying operation
and a JPY5trn asset purchase programme. BoJ has so far only utilised
30% of its asset purchase limit. If the current pace of asset
purchases is maintained, BoJ will reach the limit for its asset
purchase programme in June/July, when the Fed is also expected to end
its asset purchases.
BoJ released revised macroeconomic forecasts in connection with
today's meeting. BoJ's GDP forecast for fiscal 2010 (FY 2010) was
revised markedly higher to 3.3% from previously 2.1%. However, this
was solely due to a major upward revision in Japan's GDP data. BoJ's
current forecast for FY 2010 is very close to our own 3.4% forecast,
which assumes a 0.3% q/q contraction in Q4 10 and 0.6% q/q growth in
Q1 11.
Nonetheless, the revised GDP numbers suggest that the output gap in
Japan has closed more than previously assumed. BoJ's forward-looking
view of the economy is broadly unchanged; it believes the recovery is
currently pausing, but expects it to resume. The latest data suggest
that the Japanese economy resumed growing in November.
BoJ's inflation forecast for FY 2010 and FY 2011 was revised
marginally higher to -0.3% (from previously -0.4) and 0.3% (from
previously 0.1%). These minor upward revisions were mainly due to the
impact from higher commodity and energy prices globally.
*Assessment & Outlook*
With growth poised to resume and currently no severe appreciation
pressure on JPY, we expect the rest of the year to be status quo for
BoJ. It will most likely continue to purchase until July, but we do
not expect the asset purchase programme to be expanded further. We
expect the leading interest rate to be left unchanged until at least
Q4 2012. BoJ has signalled that it will maintain its "zero interest
rate policy" until price stability is in sight. BoJ has also indicated
that price stability implies that inflation should be close to 1% (BoJ
board members' "understanding" of price stability) and not just that
consumer prices are out of deflationary territory.
With the output-gap closing somewhat faster than previously expected
due to the revised GDP numbers and the impact from higher commodity
prices, this could be within reach in late 2012. However, unlike in
most other countries, inflation in Japan is still substantially below
target, with headline inflation still negative in Japan.
Hence, unlike the eurozone, the UK and to some degree the US, there
will be less pressure on JPY to respond to the recent sharp increase
in food and energy prices. This is partly reflected in the interest
rate spread. For example, the 2-year interest swap spread to the US
has increased from close to zero in November last year to currently
around 40bp since November. This has contributed to putting a floor
under USD/JPY and should eventually also support a weaker JPY.
Source: ActionForex.Com
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