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9 Feb 2016
JPY: Further monetary easing likely in July 2016 – Nomura
Research Team at Nomura, suggests that in light of various developments on the financial markets and elsewhere since the BOJ moved to a negative interest rate policy, their main scenario now sees the BOJ carrying out further monetary easing in July 2016.
Key Quotes
“A failure of inflation indicators to improve to the extent that the BOJ expects is likely to be the trigger for this further monetary easing, in our view. Assuming that crude oil prices and forex rates remain at current levels, we think that y-y growth in both the core core CPI (the headline CPI less food— excluding alcoholic beverages—and energy) and the new core CPI (the headline CPI less fresh food and energy), the BOJ’s key measures of underlying inflation, already peaked in Oct–Dec 2015.
We see the boost from the weak yen to these inflation indicators, including for food, gradually fading from now on. Lower core core CPI and new CPI inflation will likely lead to lower inflationary expectations as measured by various surveys. Such a decline would, we think, prompt the BOJ to introduce further monetary easing measures in a bid to raise inflationary expectations.
Further monetary easing unlikely in April 2016: We think that a fall in core core CPI inflation and new core CPI inflation will be evident to some extent at next BOJ monetary policy meeting in April. We think further monetary easing is unlikely in April, however, as the BOJ only decided to adopt negative interest rates in January, and will probably need some time to gauge the impact of that move on the economy and inflation.
Additional monetary easing likely to take the form of both interest rate cut and increased risk asset purchases: We see additional monetary easing in July 2016 taking the form of both a reduction in the BOJ’s policy rate on current account deposits from -0.1% to -0.3% and an increase in the bank’s purchases of equity ETFs (from around ¥3trn a year currently to about ¥6trn) and Japanese REITs (from around ¥90bn a year to around ¥180bn). As some market participants have already started to factor in a further cut in the BOJ’s policy rate, a rate cut alone would be unlikely to provide an adequate boost via the element of surprise that has been such a major tool in the BOJ’s armory of late. We therefore think a rate cut is likely to take place in tandem with expansion of the bank’s risk asset purchasing program.”
Key Quotes
“A failure of inflation indicators to improve to the extent that the BOJ expects is likely to be the trigger for this further monetary easing, in our view. Assuming that crude oil prices and forex rates remain at current levels, we think that y-y growth in both the core core CPI (the headline CPI less food— excluding alcoholic beverages—and energy) and the new core CPI (the headline CPI less fresh food and energy), the BOJ’s key measures of underlying inflation, already peaked in Oct–Dec 2015.
We see the boost from the weak yen to these inflation indicators, including for food, gradually fading from now on. Lower core core CPI and new CPI inflation will likely lead to lower inflationary expectations as measured by various surveys. Such a decline would, we think, prompt the BOJ to introduce further monetary easing measures in a bid to raise inflationary expectations.
Further monetary easing unlikely in April 2016: We think that a fall in core core CPI inflation and new core CPI inflation will be evident to some extent at next BOJ monetary policy meeting in April. We think further monetary easing is unlikely in April, however, as the BOJ only decided to adopt negative interest rates in January, and will probably need some time to gauge the impact of that move on the economy and inflation.
Additional monetary easing likely to take the form of both interest rate cut and increased risk asset purchases: We see additional monetary easing in July 2016 taking the form of both a reduction in the BOJ’s policy rate on current account deposits from -0.1% to -0.3% and an increase in the bank’s purchases of equity ETFs (from around ¥3trn a year currently to about ¥6trn) and Japanese REITs (from around ¥90bn a year to around ¥180bn). As some market participants have already started to factor in a further cut in the BOJ’s policy rate, a rate cut alone would be unlikely to provide an adequate boost via the element of surprise that has been such a major tool in the BOJ’s armory of late. We therefore think a rate cut is likely to take place in tandem with expansion of the bank’s risk asset purchasing program.”