Bank of Japan unlikely to revise down assessment of economic outlook

No policy change is expected, says DBS, with BOJ raising its economic view on all regions of the country during the regional economic report for 2Q.

DBS Group Research noted:

The Bank of Japan will meet this Wednesday and Thursday and no policy change is expected. Although some key indicators like industrial production have deteriorated recently, the BOJ would note that leading indicators including the Bank’s own Tankan survey on business confidence have showed the possibility of an improvement in economic conditions in 2H.

In fact the BOJ has just raised its economic view on all the 9 regions of the country during the regional economic report for 2Q released last week. Revising down the assessment of economic outlook at this week’s meeting will be contradictory and unlikely.

Meanwhile, the pressures of weakening the yen via further monetary easing are limited at present. The yen/dollar rate stabilized at around 79-80 over the past one month. The widening of Japan’s trade deficit and the deterioration in its current account balance have helped to curb the strength in the yen, despite the heightened volatility in global financial markets that boosted investors’ demand on safe assets.

In light of the lingering risks of global growth slowdown and renewed yen appreciation, the BOJ will likely keep the door open for further quantitative easing. Further easing measures, if taken later this year, would include the buying of longer dated JGBs and/or risk assets like ETFs and REITs.

After the BOJ in April extended the tenor of JGBs to be purchased (from 1-2 years to 1-3 years), the 3 year government bond yield has already fallen to cross over the 1 year / 2 year yields last month. Meanwhile, the BOJ’s purchases of non-JGB assets such as ETFs and REITs have already reached about 80% of the existing limit as of end-June.