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The Bank of Japan (BoJ) is scheduled to meet on July 19-20, announcing its decision on Thursday to review monetary policy and publish the quarterly economic outlook report. Owing to the pickup in exports, industrial production and consumption, the BoJ may upgrade the GDP growth outlook and revise up the FY2017-18 forecast slightly, by 0.1-0.2 ppt.
On the other hand, however, the sluggish CPI data will likely oblige the central bank to cut inflation estimates. Both the FY2017 core CPI forecast of 1.4 percent and the FY2018 forecast of 1.7 percent may be cut notably, to about 1.0 percent and 1.5 percent respectively. As such, the CB will also need to push back the estimated timing for achieving the 2 percent inflation target, probably from “around FY 2018” to “around FY 2019”.
Board members will likely continue to stress that inflation is on the uptrend, on the back of above-potential GDP growth and a positive output gap. But they would also admit that the reflation process takes longer than expected as companies remain cautious on wage and price setting. The governor is unlikely to hint a change in policy stance or to disclose any details about the future exit plan at this meeting.
In fact, the BoJ has sent a strong signal recently that it will maintain status quo on monetary policy and won’t follow the Fed or other major central banks to tighten soon. In response to the rise in JGB yields as a result of higher overseas yields, the BoJ boosted the amount of long-term bond purchases and conducted fixed rate operations on July 7, and took further steps to increase the buying of 3-5Y JGBs on July 12.
"Given that the short-term inflation outlook is far weaker than official expectations, there should be little reason for the BoJ to raise the interest rate targets or to allow the actual yields to rise significantly in the coming months," DBS Bank commented in its latest research report.
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