The Bank of Japan is expected to keep monetary policy steady on Thursday even as volatile financial markets, sluggish global growth and anaemic inflation keep policymakers under pressure to do more to reflate the economy out of stagnation.
But the yen’s rise to a nearly two-year high against the dollar, triggered by a less aggressive outlook for interest rate hikes by the U.S. Federal Reserve, is seen keeping BOJ officials on edge as they scrutinise risks to the fragile recovery.
There is a chance BOJ Governor Haruhiko Kuroda could spring a surprise monetary easing if he sees recent yen gains as damaging enough to the export-reliant economy to justify action, say sources familiar with the central bank’s thinking.
“It might be dangerous to leave yen rises unattended,” one of the sources said on condition of anonymity.
But many BOJ officials prefer to hold off on expanding stimulus, clinging to hope that an expected pick-up in economic growth later this year will push up wages and offset falling goods prices, they say.
“The BOJ has been saying that underyling trend inflation is improving. If so, it doesn’t need to ease,” said Junichi Makino, chief economist at SMBC Nikko Securities.
“But if there’s a risk the price trend could change in the future, the BOJ will probably ease pre-emptively without hesitation,” he said, predicting a BOJ easing in June or July.
The BOJ is expected to maintain its massive asset buying programme at its two-day rate review ending on Thursday, pledging to increase base money at an annual pace of 80 trillion yen ($753 billion).
It is also expected to leave unchanged a 0.1 percent negative interest rate applied to some of the excess reserves financial institutions park with the central bank. It shocked global markets with a move to negative rates in January.
NO HELP FROM FED
While a possible vote by Britain to leave the European Union is the biggest near-term concern for BOJ officials, they also see it as reason to hold fire until after the June 23 referendum.
A Reuters poll showed economists see a much higher chance of the BOJ easing at its meeting on July 28-29, when it issues fresh quarterly growth and inflation forecasts, assuming that global markets remain stable.
The BOJ is caught in a bind. Despite nearly three years of aggressive money printing, inflation has ground to a halt on weak consumption and exports.
In addition, receding expectations of a near-term U.S. rate hike have dashed the BOJ’s hopes to get help from the Fed to keep sharp yen rises at bay.
The Fed kept rates unchanged on Wednesday and signalled it still planned to raise rates twice in 2016, although it said slower economic growth would crimp the pace of monetary policy tightening in future years.
While Kuroda argues he has plenty of ammunition to ease further, some BOJ officials have openly voiced doubts on what more the central bank can deliver and whether it will be any more successful than earlier stimulus efforts.
“If you compare what the BOJ has been saying and what it actually achieved, it’s clear what the bank has been saying hasn’t materialised,” said Kenji Yumoto, chief senior economist at Japan Research Institute.
“Even if BOJ does ease, its effects are limited. If it continues to ease, it can run out of tools. The market is starting to recognise the limits of monetary easing.” ($1 = 106.3000 yen)