BOJ Under Pressure to Act but October More Likely

BOJ Running Out of Options Expected to Keep Stimulus Unchanged

The Bank of Japan (BOJ) is not expected to announce an expansion to its already massive stimulus spending later today. The Japanese central bank shocked markets on October 31, 2014 when out of the blue announced a $60 billion of monthly stimulus but only a minority of market watchers expect the BOJ to repeat the surprise announcement. Inflation continues to struggle and the 2 percent goal outlined by Prime Minister Shinzo Abe is still far away. The majority of market analysts are increasing their forecasts for an intervention from the BOJ in October but questions remain of the effectiveness of central bank policies against market shocks.

Japanese inflation stands close to zero as macro economic conditions have shifted against higher prices. The Chinese slowdown and stock market sell off has dampened the momentum that the Japanese economy had amassed, which is why expectations run high of an October stimulus announcement.

Bank of Japan Governor Haruhiko Kuroda is fully committed to Shinzo Abe’s 2 percent target, but the rest of the central bank board is showing dissent. The weak yen has not been the cure-all to Japan’s maladies. Upper house elections next year limit the price level the JPY can fall, before it hurts lower income households through higher import prices, which makes the currency a hot topic in an election cycle.

The BOJ rhetoric has been mostly optimistic about the growth of the Japanese economy. The macro economic headwinds are out of the central bank’s control and putting immense pressure on inflation through lower energy and food prices. The 2 percent goal is at this time unreachable, even with a further round of stimulus and that is at the heart of the internal debate in the BOJ.

The USD/JPY is trading above 120.33 but far from the four week high at 124.33 seen on August 16. Looking back at the yearly chart is obvious the effect the shock Halloween announcement of 2014 had on the currency. It is unclear if the BOJ needs or even wants such a harsh move ahead of the U.S. Federal Reserve’s decision on rates on Thursday.

Kuroda has not been forthcoming about the timing on further monetary policy easing, but he has taken the 0.1 percent money market rate floor off the table. Business confidence in Japan has risen, but capital expenditure has not risen on par with optimism. Japanese companies plan to spend 6.1 percent more this year, an improvement of an earlier 5.9 gain. Wage inflation and higher investment from companies are needed if Shinzo Abe hopes to reach his lofty goal of 2 percent inflation for Japan.

Bank of Japan events to watch this week:

Monday, September 14
Tentative JPY Monetary Policy Statement
Tuesday, September 15
Tentative JPY BOJ Press Conference
Thursday, September 17
2:35am JPY BOJ Gov Kuroda Speaks

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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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 has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. 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