BoJ to conduct assessment of 'further effective and sustainable monetary easing'

Chris Scicluna

Markets mostly little changed in Asia as BoJ flags review and investors await US fiscal stimulus announcement
Despite record coronavirus deaths, a disappointing Philly Fed manufacturing survey and the highest initial jobless claims reading in three months, Wall Street advanced to new highs on Thursday. The S&P500 closed with a 0.6% gain, bond yields nudged higher and the US dollar index hit new lows as investors expectantly awaited the announcement of agreement to provide around $900bn of additional fiscal stimulus, which according to Senate Majority Leader McConnell “appears to be close at hand”. That announcement is yet to arrive – with some reports suggesting that negotiations may continue into the weekend – and so US equity futures have weakened marginally since Wall Street closed.

Turning to the Asia-Pacific region, most interest today was focused on Japan where the BoJ extended its ‘special financing programme’ as expected, but also announced that it would be conducting an assessment of ‘further effective and sustainable monetary easing’ that might help it to achieve its elusive inflation target. Investors evidently expect little major changes from this review, as the TOPIX and JGB yields were largely unchanged after the announcement – the former closing down just 0.1% – while the yen was only slightly weaker. However, what was shaping up as a flat day in China and Hong Kong was interrupted following a Reuters report suggesting that the US would soon blacklist a further 80 or more mainly Chinese firms from access to US technology, with the news sending the CSI300 to a 0.4% loss while the Hang Seng fell almost 1%. The key underperformer today was Australia, with the ASX200 falling 1.2% after a new community outbreak of coronavirus in Sydney’s northern beaches swelled to 28 cases, causing some states to impose restrictions on arrivals from the affected area.

BoJ extends special financing programme; says current framework working well but will assess other measures to assist in meeting inflation target
As had been widely expected, the BoJ left almost all dimensions of its policy unchanged when the Board concluded its latest meeting today. So its short-term policy rate was left at -0.1%, and the 10Y JGB yield target was left at around 0%, with only the usual one dissenter to the decision from among the nine Board members (Kataoka, who continues to call for further easing). In addition, the upper limits for its purchases of ETFs (about ¥12trn), J-REITS (about ¥180bn), corporate bonds (about ¥10.5trn) and CP (¥9.5trn) were all left unchanged too, as was its commitment to purchase an unlimited amount of JGBs as required to hit its 10Y yield target.

As had been equally expected, especially after Governor Kuroda had signalled as much following his October press conference, the one tweak to policy was the extension of the ‘Special Program to Support Financing in Response to the Novel Coronavirus’. This programme – which aims to lower funding costs for SMEs by buying CP and corporate bonds and making cheap funding available to banks that lend money to SMEs – will now conclude 6 months later than previously scheduled i.e. at the end of September 2021. The additional purchases of CP and corporate bonds will continue to be subject to an upper limit of ¥15trn, while the distribution between each asset will be determined by market conditions (previously each asset was subject to a ¥7.5trn cap). With regard to the provision of cheap funding of banks, in order to provide more encouragement to these institutions to make loans to SMEs, the BoJ removed the previous ¥100bn upper limit provided to each eligible counterparty.

Looking ahead, as usual the BoJ pledged to continue its Quantitative and Qualitative Easing (QQE) with Yield Curve Control for as long as is required to achieve the Bank’s target of 2% annual inflation, with money base expansion to continue until the forecast measure of core CPI (i.e. ex fresh foods) exceeds 2%Y/Y and stays there in a stable manner. While the current policy framework was judged to be working well and therefore not in urgent need of change, given an expectation that the pandemic will apply a prolonged period of downward pressure on activity and prices, the Bank announced that it will “conduct an assessment for further effective and sustainable monetary easing, with a view to supporting the economy and thereby achieving the price stability target of 2%”. The Bank expects to release the findings of this assessment at the March 2021 Policy Board meeting.

There was no indication in the Bank’s statement of what measures might be under consideration, although the possible negative side-effects of the current framework will be assessed. And the short time-frame underscores that the review will not result in changes as profound as those that the resulted from the Fed’s recent review and are likely to come out of the ECB’s current review. Indeed, during his post-meeting press conference, Governor Kuroda said that the review would more like ‘fine-tuning’ than the Fed and ECB reviews with the current framework judged to be working well. And he also appeared to rule out many options – e.g. an RBA-style target of a shorter-dated JGB yield or a clearer objective for super-long yields – while also noting that negative rates and the 2% inflation target would not be reviewed. His comments did, however, leave scope for greater flexibility to be introduced to the current 10Y yield target, and Kuroda also noted that the ETF purchases would be reviewed too. Of course, the BoJ will be keen to avoid anything that might upset the market mood, whether in terms of equities, bond yields or the yen.

Japan’s core CPI inflation remains soft in November, as expected
Turning to the day’s economic data, as is usually the case, Japan’s national CPI contained few surprises with the key developments well signalled by the advance CPI for the Tokyo region. After adjusting for seasonality, the headline CPI index declined 0.4%M/M for a second consecutive month, driven again by lower prices for food and energy. As a result, annual inflation fell to 0.5ppts to a more than 7-year low of -0.9%Y/Y – just 0.1ppts below the market’s expectation. Fresh food prices fell a further 8.1%M/M in November, leading to an annual decline of 1.1%Y/Y. As a result, overall food prices 1.4%M/M and 0.2%Y/Y. Meanwhile, energy prices fell a further 1.3%M/M – petroleum, gas and electricity prices all moved lower – extending their annual decline to 7.6%Y/Y (the largest annual decline in energy prices since October 2016).

Given those movements, the core index forecast by the BoJ, which excludes only fresh food prices from the CPI, fell 0.1%M/M causing annual inflation on this measure to weaken a further 0.2ppts to -0.9%Y/Y (in line with market expectations). The narrower measure of core prices preferred by the BoJ – which excludes both fresh food and energy – was unchanged for a second consecutive month, although annual inflation still fell 0.1ppts to -0.3%Y/Y. This outcome was the lowest since May 2013, but was in line with market expectations. The narrower measure of core prices used in many other countries, which excludes all food and energy, was also unchanged in the month, leaving annual inflation steady at -0.4%Y/Y. Goods prices fell 0.2%M/M in November after excluding the impact of lower fresh food prices, thanks to lower energy prices. Industrial product prices were unchanged in the month but after excluding the impact of lower energy prices were up 0.1%M/M and 1.0%Y/Y. Services prices were unchanged for a second consecutive month, but fell 0.9%Y/Y – the annual decline substantially reflecting earlier reductions in prices in the hospitality sector due to the Government’s ‘Go To’ subsidies.

Drop in UK retail sales smaller than expected during November lockdown, consumer confidence improves
With non-essential stores in England closed from 5 November through to 2 December, and further containment measures impacting sales in Wales and Scotland and the start and end of the month respectively, UK retail sales inevitably fell back last month. But with shoppers able to take advantage of online sales (up nearly 75%Y/Y) and click-and-collect services, the drop was very shallow compared to the plunge of more than 18%M/M in April at the peak of the first wave. In particular, following six successive months of positive growth, total sales fell 3.8%M/M in November to be still 2.4% higher than a year earlier and 2.6% above February’s pre-pandemic level. Sales were dragged lower particularly by clothing (down 19.0%M/M) and fuel (down 16.6%M/M, so that sales ex fuel fell just 2.6%M/M). Sales of food (up 3.1%M/M) and household goods (up 1.6%M/M) were the only categories to show positive growth.

With non-essential stores having reopened this month, the GfK consumer confidence survey also provided somewhat better news, with the headline sentiment measure rising 7pts in December to a three-month high of -26, back into the range prevailing from June to September before the second wave of pandemic kicked off. All of the key survey components were improved, including the assessment of the climate for making major purchases. We note, however, the significant deterioration in the path of the pandemic over recent days, and suspect that January’s survey will reveal a renewed deterioration in confidence.

German ifo survey to suggest softer current conditions than the flash PMIs?
Today’s data focus in the euro area will be the German ifo business sentiment survey for December. The flash PMIs released at the start of the week suggested a renewed pick up in momentum in the manufacturing sector (the respective PMI rose 0.8pt to 58.6) and a slight easing in the pace of contraction in services (for which the PMI rose 1.7pts to 47.7). Nevertheless, according to the Bloomberg survey, the headline business climate index is expected to fall for the third month in a row, albeit by less than 1pt to 90.0. The current assessment balance is expected to drop due to the worsening of the pandemic and extension of containment measures into the New Year. But the expectations balance is expected to rise 1pt to 92.5, albeit leaving it still some way off September’s high of 97.3.

Data to play 2nd fiddle in the US today as focus remains on fiscal negotiations
This week’s US dataflow concludes today with current account data for Q3 (likely revealing the largest deficit in 12 years) and the Conference Board’s leading Indicator for November (likely pointing to a 7th consecutive month of expansion). Neither report is likely to move markets, leaving investors focused on any signs of progress in negotiations to agree a fiscal stimulus package that would be acceptable to Congress.

Kiwi consumer and business confidence lifts; trade surplus hits new high
Following on from yesterday’s upbeat Q3 GDP report, today’s Kiwi confidence surveys suggested that the economy is ending Q4 on an even firmer note. The ANZ Consumer Confidence Index increased a further 4.8%M/M to 112.0 in December – the highest reading since February and now only a little below the long-term average. The improvement this month was led by a marked reduction in pessimism about the near-term economic outlook and a further lift in attitudes towards the purchase of major household items. Meanwhile, the ANZ Business Outlook Survey also pointed to a sharp lift in sentiment in December. The headline business confidence index increased more than 16pts to a 3-year high of 9.4. More importantly, the own activity index – measuring respondents’ outlook for their own business – improved more than 12pts to 21.7 – the highest reading since March 2018. The employment index rose almost 9pts to 8.8 and the index measuring firms investment intentions increased 8pts to 8.6 – both indices now above their respective long-term averages. Inflation indicators also strengthened, with firms’ year-ahead inflation expectation increasing to 1.65% – the highest reading since February. Needless to say, these surveys further undermine the case for additional monetary policy stimulus.

In other news, New Zealand recorded a seasonally-adjusted merchandise trade surplus of NZ$0.4bn in November, lifting the 12-month surplus to NZD3.3bn (imports measures on a cif basis in these figures), which is the largest annual surplus in almost three decades. Exports fell just 0.2%Y/Y but imports were down a whopping 17.5%Y/Y, not least due to a near 50%Y/Y decline in imports of crude oil and a 49%Y/Y decline in imports of capital transport equipment. Imports of machinery and plant were down 4.2%Y/Y and imports of general consumer goods were down 9.7%Y/Y – the latter suggesting continued caution by retailers despite the rebound in demand.

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