Markets growing confident BOJ will finally move

July 2, 2016 5:14 am JST

Markets growing confident BOJ will finally move

TOKYO -- Britain's referendum result and the added upward pressure it has put on the yen have heightened expectations that the Bank of Japan will inject fresh monetary stimulus in hopes of perking up economic activity and inflation.

The central bank will update its inflation forecasts out to fiscal 2018 at the next policy board meeting on July 28-29. The BOJ now sees price growth reaching its 2% target during fiscal 2017, which starts next April.

But many nongoverment forecasters reckon inflation will not go even half as far that year. A strong yen and a weak stock market leave the BOJ no choice but to lower its forecasts and deploy additional monetary easing, predicts Junichi Makino at SMBC Nikko Securities.

Predictions of further easing came before the policy board's April and June meetings, too. Both times, Gov. Haruhiko Kuroda and fellow policymakers held back, upsetting markets. If the BOJ stands still again in July, the markets "would be left with a strong impression that it has reached the limits of monetary policy, and there would be a considerable risk of further yen appreciation," says BNP Paribas' Ryutaro Kono.

Japan's benchmark long-term interest rate has plumbed a new low, reflecting both speculation that the BOJ will push further into negative interest rates, as well as the declines in overseas rates. The yield on newly issued 10-year Japanese government bonds sunk as low as negative 0.260% Friday.

BOJ watchers see a number of options for additional easing, such as cutting the interest rate on financial institutions' excess reserves at the central bank below the current negative 0.1% or increasing purchases of exchange-traded funds above the present pace of 3.3 trillion yen ($32.1 billion) a year.

Many at the BOJ believe that Japan continues to enjoy a modest economic recovery. BOJ policymakers held off on additional easing in June to give more time to evaluate the negative interest rate policy. But there is a sense of alarm at the bank over the impact of the Brexit vote.

(Nikkei)

http://asia.nikkei.com/Features/Brexit/Markets-growing-confident-BOJ-will-finally-move