BoJ weighs further stimulus as tax hike bites

But central bank may be reluctant to add more stimulus while tax hike effects are uncertain
The Bank of Japan
The Bank of Japan

Japan’s central bank is weighing up possible additional stimulus measures, but the outlook is being complicated by the impact of a consumer tax hike that kicked in on October 1.

Economists think the central bank is likely to keep its policy rate unchanged at its October 30–31 meeting.

The Bank of Japan (BoJ) is reluctant to move deeper into negative interest rates, as it is concerned over financial institutions’ earnings. Meanwhile, the central bank will likely seek to identify the impact of the tax hike before taking further actions, says Takehiro Noguchi, senior economist with Mizuho Research Institute.

“I think it is still difficult to determine [the impact of the consumer tax hike] at this time,” says Noguchi. He adds the central bank would prefer to “entrust the government with economic measures as much as possible”.

While the BoJ kept rates unchanged at –0.1% during its last meeting, governor Haruhiko Kuroda hinted at possible action in October. The central bank is worried by the global slowdown and Japan’s sliding exports.

“With the slowdown in overseas economies continuing and downside risks on the increase, we judged it’s becoming necessary to pay closer attention to the possibility of losing momentum towards our price stability goal,” Kuroda said during a briefing after the policy meeting on September 19.

Yukitoshi Funo, a member of the BoJ’s policy board, also hinted at further stimulus in a recent speech.

“Recently, slowdowns in overseas economies have continued to be observed and their downside risks seem to be increasing, it is becoming necessary to pay closer attention to the possibility that the momentum toward achieving the price stability target will be lost,” Funo said during a speech delivered at a meeting with business leaders in Shimane.

There are various possible easing measures the BoJ could employ, such as cutting the short-term policy rate, lowering the target level for 10-year JGB yields, expanding asset purchases and accelerating the expansion of the monetary base, said Funo, suggesting that the BoJ has not run out of easing tools.

“I also believe that any possible loss in momentum toward achieving the price stability target needs to be pre-empted,” Funo added.

Japan’s capital goods exports have remained sluggish since the second half of 2018, and there is no sign of bottoming out, according to a recent report by Mizuho Research Institute.

“According to the statistics of machinery orders, we have not detected any sign of capital goods exports hitting bottom in the latter half of 2019,” the report said. “Although the recovery is expected to begin from mid-2020, the timing may be delayed to the latter half of 2020 if uncertainty rises with US-China trade friction further intensifying, among other factors.”

Robert Carnell, chief economist and head of research for Asia-Pacific at ING, says the BoJ is likely to wait longer for the effects of tax hike, echoing Noguchi’s view.

“The coming months will be heavily distorted by this [tax increase], and it may not be until the New Year before we have clarity on how this plays out,” says Carnell.

Tax hike hinders spending

Japan increased the national sales tax to 10% from 8% on October 1. While the impacts on prices and inflation are uncertain now, a BoJ survey suggests the hike might hinder household spending. The survey results could alter the central bank’s view that robust domestic demand will offset some of the pain from weak exports.

Around 70% of Japanese households expect to cut back on spending after the tax increase, according to the BoJ survey, released on October 11.

More than a third of households front-loaded spending ahead of the tax hike to avoid the heavier levy, the survey showed. The quarterly survey was conducted between August 8 and September 3.

Rising yen

The yen may add more pressure if it appreciates in the coming months. “If the yen rises rapidly due to further Fed rate cuts or trade talks between the US and China, there is a high possibility that the BoJ will be driven into additional easing,” says Noguchi.

Under this scenario, the central bank could deepen negative interest rate below –0.1%, while keeping the target level of 10-year government bond yield unchanged, Noguchi suggests.

The yen has strengthened about 5% against the US dollar during the last 12 months, due to safe-haven effects and the Fed’s easing actions in July and September.

A stronger yen would tend to depress inflation, which was already just 0.3% in August, or 0.5% excluding volatile fresh food prices. The BoJ targets 2%.

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