Main focus on assessment of downside risk BoJ.The
next BoJ monetary policy meeting is scheduled for 28-29 January. Since
the last meeting the risk scenarios that the BoJ previously warned about
have started to materialize. Though at the upcoming meeting we expect
the BoJ to stay on hold while keeping a close eye on the market and
moves by governments such as China, we maintain our view that the BoJ is
likely to ease further during 1H 2016, probably around March or April.
The BoJ is shifting to a new monetary policy meeting schedule this
year consisting of eight meetings (down from 14 until last year). Of
these, at four meetings (January, April, July and November) the BoJ will
also release its Outlook for Economic Activity and Prices report. We
expect the upcoming Outlook report to acknowledge the downside risk to
growth forecasts, but maintain its outlook for a continued domestic
demand-led recovery and only make minor adjustments. On the other hand,
on the prices outlook we think the BoJ is likely to lower its FY2016
consumer price inflation forecast (ex-fresh food) from 1.4% into the
1.0% range, which is likely to be ascribed to the bigger-thanexpected
decline in oil prices. We expect market focus in the Outlook report and
postmeeting press conference by BoJ governor Haruhiko Kuroda to be on 1)
how the BoJ views the current state and outlook for exports, and 2)
whether the BoJ cites any other reasons for lowering its inflation
forecast besides oil, such as slower-than-expected wages growth.
Additional easing in March or April our main scenario:We
think three factors in particular are being focused on by the BoJ in
monetary policy decisions, namely: 1) conditions overseas and in
financial markets (particularly forex); 2) inflation expectations and
wages trends; 3) the capex trend. On capex, we believe the BoJ
remains fundamentally optimistic, despite the sharp YoY decline in
machinery orders in November, as this can be attributed to a reaction to
the sharp growth in September and October, and due to growth in planned
capex reported in the December Tankan. However, as a result of the
rising risk-off mood in the markets amid uncertainty over the Chinese
economy and the steep fall in oil, the yen has started to strengthen.
Now USD/JPY is lower than the average forecast (¥119.40) of large
manufacturers in the December Tankan, and this could be starting to have
a negative impact on corporate profits. Moreover, as the trend for EM
currencies to weaken versus USD has become clearer since China embarked
on its change in currency policy since August, the yen's effective
exchange rate, a weighted average measure of its strength versus other
major currencies, has strengthened even more than the actual USD/JPY
rate. The effective exchange rate is now higher than in 31 October 2014,
when the BoJ strengthened its QQE policy. In other words, the effective
exchange rate is telling us that the yen weakening impact of the
additional easing carried out in October 2014 has been more or less
entirely negated. As the effective exchange rate tends to show up in
core-core consumer prices (ex- energy and fresh foods) at an around
one-year time lag, continued yen strengthening would raise concerns of a
drag on inflation from 2H 2016.
The trends in inflation expectations and wages could also pose some concerns for the BoJ. Though
the number of respondents expecting inflation of at least 2%, in the
oneyear forward price forecast in the Consumer Confidence Survey, remain
in the majority at 51.9% in the latest December survey, the downward
trend has been gathering momentum. Meanwhile the proportion saying
inflation will be under 2% or no change has risen to 38.9%. Although to
some extent a result of the decline in oil prices, the fact that
household inflation expectations are back where they were before the
introduction of QQE (in April 2013) cannot be ignored.
The BoJ also released its latest Regional Economic Report (Sakura
report) on 18 January 2016, containing an assessment of jobs and wage
conditions in each of Japan's regions. According to the report, while
labor shortages are increasingly being felt around the country, wage
increases have been "in recent years mainly occurring in urban based
companies," and while bonuses are increasing, base salary increases
spreading steadily and hourly rates for non-full time employees
increased across many regions, on the other hand there remains
substantial caution in raising salaries "particularly at
regionally-based SMEs." On the outlook, the report states that
"supply/demand conditions in the labor market are likely to remain tight
for the time being. Despite which we are not yet seeing any increase in
moves by companies to raise salaries in FY2016." The BoJ also appears
to be starting to recognize that wage growth is possibly lacking
momentum. This makes the outcome of the 2016 spring wage negotiations,
effectively underway since the 19 January policy announcement by
employers' association Keidanren, all the more important.
In light of the above, the possibility that the BoJ will
loosen monetary policy further in 1H 2016 has increased in the past
month, in our view. However, as a central bank the BoJ does
need to avoid over-reacting to short-term trends in the stock market,
and with the current market concerns being mainly due to overseas
factors, we believe the BoJ will need more time to assess the policy
reaction of the Chinese authorities and US economic data. Also, by March
it should have various other data on which to assess the trend in
salaries, including the outcome of the 2016 spring wage negotiations
(most settlements being made by mid-March), the trend in winter bonus
payments (December monthly data is for release on 8 February), and
January onward wages data free of sample bias (for January due for
release on 4 March). Given the size of the volatility in financial
markets and time-lag before monetary policy works its effects, our main
scenario is for additional BoJ easing in March or April, though we
cannot entirely rule out the possibility of additional easing at the
upcoming meeting.
