Bank of Japan policymakers are in no mood to expand monetary stimulus this week, sources familiar with their thinking say, even as poor data challenges their presumption that economic recovery will boost inflation to its 2% target next year.
When BOJ Governor Haruhiko Kuroda last opened the monetary taps, in October, he was backed by a razor-thin majority on the bank’s board, and although subsequent changes have moved the board closer to his policy stance, a repeat looks even less likely now, the sources said.
With inflation and growth still in the doldrums despite the bank’s 80 trillion yen ($665 billion) per year asset buying measures, they said the board had grown increasingly concerned about their diminishing policy options and the downsides of the stimulus, such as draining liquidity from the government bond market.
Investors mostly expect the BOJ to stand pat at least until Oct 30, when it updates its long-term economic and growth forecasts, so a surprise move might have an outsized impact on markets.
But that looks like one of the very few incentives for it to act now, with risks to the bank’s policy targets – such as weak global demand and China’s slowdown – mostly beyond its control, said the sources.
“There’s not much the BOJ can do to respond to overseas headwinds,” said one source. “What’s important is that domestic demand remains firm.”
The government also does not welcome additional monetary steps that might weaken the yen further and boost import costs.
Easing now would run counter to the government’s policy priorities, government officials say.
With an upper house election looming next year, Prime Minister Shinzo Abe’s administration has shifted its focus to helping low-income households and pensioners hit by the rising cost of living from a weak yen.
“A lot of people are getting suspicious on what benefits there are to additional monetary easing,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “Politicians don’t want the yen to weaken too much.”
Those betting on a surprise cite similarities to last October, when Kuroda expanded stimulus without prior warning to prevent slumping oil costs and weak consumption from hurting inflation expectations.
Kuroda’s decision caught even some of the nine board members off guard, angering four of them enough to vote against him.
With one of the dissenters having retired and been replaced by a former auto executive more supportive of Kuroda’s views, the governor would in theory have less trouble getting his way if he sees the need to ease, the sources said.
But many on the board hope they won’t face that decision, relying on companies to use their record profits more on wages and investment.
Like last October, renewed falls in oil costs are weighing on inflation. But household income is rising and underpinning consumption, which is firmer than last October when households were feeling the direct hit from a tax hike, BOJ officials say.
Business sentiment and capital expenditure have held up even as markets have been lashed by fears of a hard landing for China, they argue, based on internal hearings they conduct on firms across Japan.
Kuroda told parliament on Thursday that while the recovery appeared “patchy”, conditions were falling in place for inflation to hit 2 percent as more firms raise prices.
He also signalled that any delay in hitting that target wouldn’t trigger policy action if it was due mostly to oil price falls.
It has now become a near certainty that the BOJ will cut its economic and price forecasts for this fiscal year at the Oct. 30 review. But with few tools left to deploy, the BOJ will cling to its goals for as long as possible, even if they appear increasingly out of touch with reality, some analysts say.
“If you don’t have many policy tools left, you don’t want to use it now,” said Mari Iwashita, chief market economist at SMBC Friend Securities.
“You want to save it for later, given worse things could easily happen to Japan’s economy.”
(c) Copyright Thomson Reuters 2015.