The Japanese central bank, Bank of Japan, is set to hold its monetary policy meeting this week. According to a DBS Bank research report, the central bank is likely to stand pat, maintaining its policy rate at -0.1 percent and the 10y JGB yield target at 0 percent. The BoJ is expected to sound more positive on the outlook of economic growth in its policy statement, citing the rebound in exports, recovery in investment and drop in the jobless rate.
While the first quarter GDP rate was downwardly revised to 1 percent from the preliminary estimate of 2.2 percent, it was mainly because of inventory destocking instead of softness in final demand. The high-frequency production and consumption data imply that the second quarter growth would be solid, noted DBS Bank.
However, the central bank will have to admit the softness in inflation. CPI prints remained in the range of 0 to 0.5 percent year-on-year through the January to April period, coming below the central bank’s target rate of 2 percent by a greater margin. The second quarter Tankan survey, which is set to come out in early-July, is expected to show that inflation expectations continue to be weak in the corporate sector, dragged by the drop in oil prices and softness in the actual consumer prices. There is a high possibility that the Bank of Japan would lower its inflation forecast and postpone the 2 percent prices target again when it reviews the medium-term economic projections during its July meeting, stated DBS Bank.
Given the sluggish inflation outlook, the Bank of Japan is expected to remain a laggard amongst the G3 central banks in normalising monetary policy. The U.S. Fed is largely expected to raise interest rates during its meeting on Thursday, speeding the pace of rate increases. On the contrary, the BoJ is expected to reiterate that it would continue to expand monetary base until inflation surpasses the 2 percent target and remains above it in a stable manner, added DBS Bank.
