Bank of Japan pressured to ease policy again

Economy is slowing faster than expected.

According to DBS, industrial production data and the Bank of Japan’s monetary policy meeting will be closely watched this week.

Here's more from DBS:

The faster-than-expected deterioration in the economy requires further policy support from the central bank. The BOJ will meet tomorrow to review monetary policy as well as its annual GDP and price forecasts.

Market expectations are building that the BOJ will ease policy again, and at the same time, revise down economic forecasts.

The political pressures facing the central bank are also mounting. The government would attempt to boost sentiment, at a time when the public support rate of the ruling DPJ is falling sharply and the opposition LDP is pushing for an early election by the year end.

Last week media reported that the government has asked the BOJ to increase asset purchases by JPY 20trn and bring the whole asset purchase program to JPY 100trn.

The yen has weakened against the dollar and touched the 80 level last week, on speculations of aggressive moves from the BOJ.

In our view, it is doubtful whether the BOJ will boost asset purchases by a record large JPY 20trn, after just adding JPY 10trn one month ago at September’s board meeting.

It is more likely that the BOJ will keep the scale of easing at JPY 10trn. Instead, the surprise could come from an increase in the buying of risk assets such as ETFs and REITs.

The expansion in the asset purchase program so far this year almost entirely focused on short-term government bonds and treasury bills. The BOJ would consider increasing the purchases of risk assets this time.