Bank of Japan Under Pressure to Add Stimulus

Monetary Policy Has Been the Only Effective Arrow in Abe’s Quiver

The Bank of Japan (BoJ) shocked markets a year ago when it announced additional stimulus on Halloween day. A year has gone by and Prime Minister Shinzo Abe’s lofty goal of 2 percent inflation remains elusive. BoJ Governor Haruhiko Kuroda was recruited to helm the central bank after he commented on the Abe’s controversial inflation goal when he was head of the Asian Development Bank. Monetary policy remains the only action that has yielded any success for Abenomics. The market has consensus on the BoJ’s next action which is to add more funds to its stimulus program, but the timing is a source of division amongst analysts. The central bank will announce any changes to its monetary policy at the end of its two day meeting near midnight EDT.

Analysts expect the BoJ to add more stimulus to the economy in October. If the central bank does not act now, it could be replay of last year when the other monetary policy window at the end of the month is used. On October 30 the BoJ will publish its biannual outlook report on the economy, with anticipated downward revisions to growth and inflation. The recent signing of the Trans-Pacific Partnership (TPP) could also shift the time table, although the deal won’t be ratified by all partners until at least four months.

The Bank of Japan announcement is a potential market moving event investors need to be aware and plan accordingly.

TPP Could Offset Japan’s Losses in China

The news of the initial agreement on the Trans-Pacific Partnership could add the needed jolt to allow the Bank of Japan to add to its already record stimulus. The slowdown in China, preceded by an ugly boycott to Japanese product made Japan look elsewhere for a bigger market to offset those losses. There is no market bigger than China, so the alternative was the TPP. One of the last to join the negotiations, but at points one of the most likely to derail them Japan finally agreed to lower its barriers to trade. The recent agreement of the treaty could be taken as a good sign for the BoJ to launch further easing as the government would be seen on not only relying on the tried and true, but also expanding its trade opportunities.

Abenomics 2.0 Looks Like a Political Tool

Shinzo Abe was elected Prime Minister of Japan by shedding his own past failures and promising the Japanese people their economy could do the same. In what has been dubbed “Abenomics” Shinzo Abe’s strategy relied on 3 arrows to boost inflation. Fiscal stimulus, monetary easing and structural reforms. So far Abenomics is 1 out of 3, with only the Bank of Japan’s record high monetary easing providing any effect and deployment without a hitch. The sales tax rate hike proved that the economy was not ready to take on fiscal responsibility and growth at the same time, which has scraped further plans to raise it again anytime soon. Structural reforms were met with the same wall of old, politics, leaving Abe with little room.

Enter Abenomic’s second act. Not as bombastic as its predecessor and with more inward focus Abe is now putting national interests first. He is now aiming to fire arrows that have a deeper effect domestically such as a strong economy, improvements to social security and tackling low birth rates that threaten Japan’s competitiveness.

The fate of Abenomics 1.0 or its sequel still depend on the Bank of Japan delivering on the only effective arrow in the quiver.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza