Daily Management Review

Unperturbed By Recession, BoJ Leaves April Policy Change On The Table


Unperturbed By Recession, BoJ Leaves April Policy Change On The Table
Despite the economy entering a recession, the Bank of Japan is expected to remove negative interest rates in the next months, according to reports quoting information from people familiar with its plans. However, because of the country's poor demand, they may wait to take action until they have more information about wage growth.
When data unexpectedly showed Japan's GDP declining for two consecutive quarters—technically a recession—and losing its ranking as the third-largest economy in the world to Germany on Thursday, observers were taken aback.
Even if the GDP numbers were shocking, BOJ policymakers are more concerned about whether the massive pay increases scheduled for 2024 will occur in 2019. This is because the central bank believes that for Japan to recover from decades of low household consumption, these increases must be repeated.
Because of this, the BOJ continues to view the annual salary discussions this spring, which will determine pay levels for 2025, as a more significant economic indicator than the GDP for the fourth quarter, which looks backward.

In addition, an end to negative rates is now more likely at the BOJ's April meeting rather than its March meeting, giving the bank more time to gauge the state of the economy. This is due to the consumer-sector weakness reflected in the GDP statistics.
"It's true domestic demand lacks momentum. But GDP is only among many data points the BOJ looks at," said one source. "What's important is the economy's broader trend and the outlook," another source said, a view echoed by third source.
Since taking office last year, BOJ governor Kazuo Ueda has been preparing the way to move away from the extreme monetary stimulus that his predecessor, Haruhiko Kuroda, instituted. Kuroda's stimulus has been held responsible for significant distortions in the financial markets.
Ueda adhered to the plan on Friday, saying that despite the GDP figures, adjustments to different monetary easing measures, like as negative rates, remained possible.
Growing labour shortages have prompted numerous companies to announce large compensation increases, raising expectations of widespread wage increases that would provide households with the purchasing power to withstand gradual price increases.

By supporting demand and the overall economy, the BOJ wants to reduce cost-push pressure and sustainably contain inflation near its 2% objective, enabling it to normalise monetary policy.
Deputy Governor Shinichi Uchida provided a detailed explanation of the BOJ's strategy for unravelling its intricate policies last week, which included a commitment to refrain from quickly raising borrowing costs once negative rates were terminated.

The majority of market participants now anticipate that negative rates will stop either at the BOJ's policy meeting on March 18–19 or on April 25–26, thanks to the well-telegraphed signals. All ten analysts surveyed by Reuters following the announcement of GDP statistics predicted that negative rates would halt by April.

Postponing the removal of negative rates may hasten the yen's recent falls, which would increase import costs and harm the already fragile consumption.
"Markets are already fully pricing in the chance of action either in March or April," a fourth source said. "If the BOJ forgoes action, that could be a huge shock to markets."
The BOJ may decide to act in April rather than March in order to gather more information, even if it will remain true to its strategy for a near-term departure. This is because the economic outlook is uncertain.

Some economists predict that the weak consumer spending and labour shortages-related delays in capital expenditure will cause the economy to decline once more in the current quarter.

The conclusion of large companies' pay discussions with unions on March 15 is one of the key data points that BOJ officials will probably review prior to their March meeting.
Due on March 11, revised October-December GDP statistics may potentially be significant given the significant adjustments observed in previous releases, particularly in the area of capital spending, which has the potential to change perceptions about the state of the economy.
Policymakers will be able to examine the BOJ's quarterly "tankan" survey, which is due on April 1, in order to get insight into whether businesses are sticking to their optimistic capital investment plans, if they wait until the April meeting.

The chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities, Naomi Muguruma, believes that negative rates will stop in April. "If the tankan underscores the resilience of capital expenditure, that could offset the weak GDP outcome," she said.

A new look at whether pay raises are spreading across the country will also be provided to board members during the BOJ's quarterly regional branch managers meeting, which is scheduled for mid-April.
Experts predict that the BOJ will continue to indicate that the end of negative rates won't be followed by the kind of dramatic rate hikes observed in the US, in an effort to placate lawmakers concerned about the possibility of a deeper recession.
"The BOJ will probably keep explaining that ending negative rate isn't tantamount to monetary tightening," said Koichi Fujishiro, chief economist at Dai-ichi Life Research Institute.
(Source: usnews.com)