BoJ left rates unchanged but remains cautious – UOB

Senior Economist at UOB Group Alvin Liew reviewed the latest BoJ event.

Key Quotes

“In its scheduled Monetary Policy Meeting (MPM) today (15 July), the Bank of Japan (BOJ) as widely expected, kept all of its existing monetary policy easing measures unchanged from the 22 May 2020 MPM. Like the previous meetings, this was not a unanimous decision as BOJ policy board member Goshi Kataoka dissented again for similar reasons given in the 22 May MPM.”

“The BOJ also maintained its cautious recovery view unchanged in its July outlook for economic activity… That said, it noted that its outlook in this latest report is ‘extremely uncertain’ and it is based on the highly uncertain assumptions that 1) a second wave of COVID-19 will not occur on a large scale, 2) firms’ and households’ medium and long-term growth expectations will not decline substantially and 3) financial stability with the smooth functioning of financial intermediation.”

“The BOJ projection for economic activity and prices remained weak due to the severity of COVID-19 but the latest revisions impart a marginally more optimistic rebound after FY2020. It’s latest FY2020 GDP contraction is projected to worsen to -5.7% to -4.5% from -5 to -3% in April MPM while the rebound in FY2021 is slightly stronger at +3 to +4% (from +2.8 to +3.9% previously in April MPM).”

“Japan is expected to experience mild deflation (-0.6 to -0.4%) in FY2020 before returning to a very mild inflation of +0.2 to 0.5% in FY2021. Inflation will return to subdued price increases but remains well below the 2% BOJ target in the projection period of FY2020 to FY 2022. It may not exceed 1% on average even in FY2022.”

“We have not changed our view and we still expect the BOJ to do more and enhance its monetary easing stance further in 2H20. However, our long-held view that it will ease via deepening further its negative policy rate is now an increasingly remote possibility, as recent MPMs clearly demonstrated its immense resistance to push rates deeper into negative territory. Instead, we think the BOJ will ease via increasing its JGB purchases. It may also expand its lending facilities to Japanese corporates and SMEs while the ETF and corporate bond buying program may be enhanced (but at a later date in 2H20).”