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Gold Prices Fall Amid Rate Jitters; Copper Steady as China Stimulus Eyed 
The Bank of Japan's more upbeat economic assessment today suggests that the introduction of more stimulus as early as July is off the table. However, analysts remain convinced that the prospect of prolonged below-target inflation will convince policymakers to step up the pace of easing by October.
The Bank decided earlier today that it will continue to expand the monetary base at an annual pace of ¥80 trillion, as expected by all analysts polled by Bloomberg, ourselves included. Mr Kiuchi proposed a reduction in the annual pace of asset purchases to ¥45 trillion, as he did at the last two meetings, but he was overruled by the rest of the Board.
The statement was more upbeat than at previous meetings. Policymakers no longer see a sluggish recovery in some areas of private consumption, but now judge consumer spending to be "resilient" without qualification. While the Board noted that public investment had started to decline, it also said that housing investment had shown signs of picking up.
In the post-meeting press conference, Governor Kuroda said that the release of rather strong GDP data earlier this week was a key reason for the Bank's more confident stance. Indeed, the 2.5% annualised rise in output last quarter implies that the economy expanded at a faster pace than the Bank's 2.0% forecast for GDP growth in the current fiscal year. To be sure, the number was flattered by an outsized boost from inventories, but Mr Kuroda argued that this wasn't a big minus for the economy. As such, the chances of additional easing being announced as early as July are now slim.
According to Capital Economics, there are two things that could convince policymakers more stimulus is required.
- The first would be signs that the economic recovery is not as strong as the Bank expects. That seems fairly likely. Industrial output has fallen by a cumulative 4% since January. It will struggle to recoup that loss in Q2.
- Second, the Bank has been arguing that a temporary slowdown in inflation does not endanger the success of QQE as long as inflation expectations hold up, and Mr Kuroda today reiterated that the 2% target should be reached early next year.
What's more, the Shunto only represents a fraction of all employees, and the spill-over to workers not covered by these talks has been sappointingly weak. In March, labour cash earnings were no higher than a year earlier. With trend labour productivity growth of around 1% per annum, wage growth is far too slow to create even modest price pressure.
The upshot is that inflation is unlikely to pick up as quickly in the second half of the year as the Bank expects. Analysts therefore still think that policymakers will have to step up the pace of asset purchases before too long, with the late-October meeting now the most likely venue for this to happen.
