BOJ Weighs Another Halloween Surprise

The Bank of Japan Is Expected to Downgrade Inflation and Growth Targets, but Future of Stimulus Program is Uncertain.

Central bank actions have dictated the pace of the market this year. The Bank of Japan (BOJ) shocked investors this time last year when they announced a surprise expansion to its stimulus program on Halloween but have not announced any major initiatives since then. Inflation continues to be well below the 2 percent target set by the BOJ and the Shinzo Abe government. So far the only arrow to have any meaningful impact from Abenomics is the monetary policy intervention by the BOJ.

Analysts and policy makers remain divided on the BOJ’s next step. Abenomics 2.0 was launched with little fanfare and again the eyes of the market are on the central bank to intervene with an expansion of its massive bond-buying program. The lack of action from the Federal Reserve in September and October has forced other central banks to ease their monetary policies further.

Japan’s industrial output beat expectations by posting a 1 percent growth figure when a negative 0.5 percent was forecasted. The rebound in the total output from manufacturers, mines and utilities is one of the few positives that allow the BOJ to could hold off on additional stimulus until later.

The Bank of Japan monetary policy statement will be released near midnight on Thursday, October 29. The Economic outlook report will be published on Friday, October 30 at 2:00 am EDT and will be followed by a press conference with an undetermined start time.

Analysts expect the BoJ to add more stimulus to the economy in October. In 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.

BOJ Likely to Deliver End of October Easing Boost

The Bank of Japan is no stranger to Halloween surprises. Last year it spooked markets with an unannounced increase to its stimulus program after the economy failed to grow according to plan. The sales tax hike introduced last year was to blame, but not other factors have put into question the lofty goals of Prime Minister Shinzo Abe. Abenomics introduced three arrows as the main drivers of growth in Japan. The only one which has had any success at all is the monetary policy push by the Bank of Japan. Abe has introduced a sequel to his growth strategy that is more politically conservative and focusing on domestic issues is not anticipated to boost inflation nowhere near the 2 percent target. Enter the Bank of Japan again. With a slow inflationary growth scenario yet again, and the Federal Reserve not doing its part to lower the Japanese Yen by standing pat, the Bank of Japan is expected to increase the size of the stimulus package before the end of the year.

The BOJ is not expected to cut its 2 percent goal by more than 0.1 next week, which means that an intervention would be needed if the Japanese economy is ever to reach that in the allowed time frame. As a counter argument Finance Minister Taro Aso has said that easing alone won’t bring the economy near the target and that internal demand must pick up. Nomura amongst other banks expect the BOJ to increase its QE program but so far the government has been confident in the current levels of easing and the work of the central bank. That being said investors should be ready for another Halloween surprise as the Bank of Japan is due to release its statement.

JPY events to watch this week:

Thursday, October 29
Tentative JPY Monetary Policy Statement
Friday, October 30
2:00am JPY BOJ Outlook Report
Tentative JPY BOJ Press Conference

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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