BOJ stayed on hold; government mulls fiscal stimulus

The Bank of Japan kept its QQE program unchanged yesterday. Governor Kuroda downplayed the recession worries, attributing the decline in 3Q GDP to a temporary adjustment in inventories. While acknowledging the weakness in inflation indicators, he reiterated the view that inflation expectations are on the rise from a longer-term perspective. It seems that the BOJ is taking a wait and see approach on monetary policy. It may need some time to gather information about the 4Q economic development, and to assess the impact on the yen from possible Fed tightening and ECB easing. 

Renewed pressure on the yen as a result of USD strengthening could reduce the need of additional BOJ easing. But a weaker-than-expected growth recovery and a persistence of negative output gap will put more pressures on the BOJ to take further actions. QQE expansion remains a possible event for the next 3-6 months. 

Compared to monetary policy, there is more clarity on the fiscal side. PM Abe has said this week that he will order the compilation of a supplementary budget to shore up the economy. The size of the supplementary budget is expected to be about JPY 3trn, given that the finance ministry wants to rely on leftover funds from previous years for financing and to avoid new debt issuance. Spending will likely be directed to increase childcare support and improve social security, consistent with the focus of the new three arrows of Abenomics.