BoJ likely to stay pat on rising global uncertainties

The Bank of Japan is expected to remain on hold at its monetary policy meeting scheduled on June 16. This is despite the need for further policy easing, as suggested by recently released economic data.

GDP growth rose 1.9 percent q/q at a seasonally adjusted annualized rate in the first quarter of 2016 after falling 1.8 percent in the last quarter of 2015, meaning no growth over the past two quarters. The second growth of 2016 appears to be weak too, as evidenced by the marginal rise in April industrial production and household spending. Meanwhile, headline CPI has slipped to a negative 0.3 percent y/y in April from 0.1 percent in Q1. The core-core CPI has also slowed to 0.9 percent from 1.1 percent.

However, this may not be the correct time for the central bank of Japan to act at this policy meeting. The uncertainty over the United States Federal Reserve’s action at the Federal Open Market Committee (FOMC) meeting scheduled on June 14 to 15, also posit reasons for the BoJ to remain muted this Thursday.

Also, against the backdrop of a broadly weak dollar, the impact of BoJ easing on the USD/JPY could be discounted. Meanwhile, the Brexit referendum is scheduled at the end of this month. The BoJ would find it necessary to watch the voting results and the financial market reactions, to judge whether policy easing is urgently needed, DBS reported.

However, a policy move in the third quarter seems likely as the dollar is expected to rebound amid strong hopes of a Fed rate hike in the coming months. Moreover, the uncertainties that loom over the June 23 Brexit referendum is also likely to subside over, which will pave the way for a policy action then.

Domestically, Abe’s government is likely to draft a JPY 5-10 trn supplementary budget this autumn after the upper house election concludes. This would mean more pressures for the BOJ to support the economy through a coordinated monetary policy response, the reported said.