Concerns growing about how the BoJ will handle this week’s meeting - Rabobank

Research Team at Rabobank, suggests that the summer ‘lull’ is in sight, the softer tone in global equities as we open this morning arguably has more to do with the Federal Reserve and Bank of Japan (BoJ) meetings later this week than it does with the annual pre-August wind down.

Key Quotes

“Concerns as regards just how the BoJ will handle this week’s meeting as conflicting views grow as regards Prime Minister Abe’s willingness and intention to boost the economy via fiscal pump-priming compete with views as to whether the BoJ will move to add significant monetary policy stimulus or simply hold pat.

This bumpy currency ride looks to be more a product of uncertainty as regards just how far the BoJ may (or may not) go this week, as opposed to major expectations that major fiscal stimulus is afoot. Any additional currency strength flies in the face of Mr Abe’s efforts to add stimulus to the economy via a weaker yen. Though the yen had weakened on the back of recent Brexit inspired market turmoil, the currency has slowly strengthened in the lead up to this week’s meeting. Mr Abe’s government is expected to announce a major fiscal package sometime in August, with expectations that this may be a multi-year 20 trillion yen ($188bn) package in the form of direct government spending, cheap loans and public and private sector financing.

Mr. Kuroda reiterated at a meeting of finance officials of the Group of 20 in China over the past weekend that the central bank wouldn’t hesitate to undertake additional easing if necessary. He also reiterated what he perceives as the benefits associated with simultaneous monetary easing and fiscal stimulus. Should the BoJ opt to add an additional boost this week (or in the near term) combined with a large package of government sponsored fiscal measures will no doubt prove a major shot in the arm or the prospects of the Japanese economy in the short term at the very least. Whether or not this actually amounts to anything material over the longer term is an entirely different question. Though ‘Abenomics’ is in principle a major stimulatory push for the economy, the impact has in the past proven limited at best, with growth and inflation remaining elusive after the initial euphoria faded away.

Failure on this front yet again will no doubt raise serious questions as regards the government’s ability and indeed the firepower that it actually has left in reserve to reflate the economy. Failure to achieve material benefit via the monetary policy challenge will prove more a significant credibility challenge for the BoJ. What has been missing from this mix, however, are the major structural reforms promised under the auspices of the ‘third arrow’ of Abenomics. Without the addition of the major structural reforms in the shape of improved inward migration and greater labour market flexibility, there will be very little left to go on for Japan. The political difficulties associated with implementing these reforms are perhaps the greatest challenge of all.”