BoJ retains key policy settings and lowers FY20 growth forecast

Chris Scicluna

Equity markets begin Biden presidency on a positive note
While Joe Biden was sworn in as President – thankfully, without any of the violent disruption that had been feared – the US equity market rallied to new historic highs yesterday, even as a member of Biden’s coronavirus advisory board warned that new cases could approach a frightening 500k per day in 12-14 weeks if the recent more contagious mutation takes hold. Assisted by positive corporate earnings reports, the S&P500 increased a solid 1.4% – apparently marking the best inauguration day since 1937 – and the Nasdaq increased an even larger 2.0%. US bond yields were fractionally lower despite the rally on Wall Street. However, the greenback continued to weaken and has weakened further in Asia today.

Against that upbeat backdrop, unsurprisingly, the tone has been positive across most equity markets in the Asia-Pacific region today. This is especially so in China, where the CSI300 increased 2.1% to close near last week’s record high, with a similar advance recorded in Taiwan. In Japan, the TOPIX increased a more restrained 0.5% as the BoJ offered no big surprises at its latest meeting but the December merchandise trade report was perhaps a fraction disappointing and a firmer yen weighed. In Australia, the ASX200 increased 0.8% as the unemployment rate fell slightly more than the market had expected, although bond yields moved slightly lower despite the positive labour market news.

BoJ leaves key policy settings unchanged; extends longstanding funding programmes by one year, revises economic forecasts much as expected
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 (external member Kataoka continued to call for further easing while Deputy Governor Amamiya was absent from the meeting due to being a close contact of someone who had been tested for coronavirus). In addition, the upper limit for the Bank’s purchases of ETFs (about ¥12trn) and J-REITS (about ¥180bn) was left unchanged, as was the Bank’s commitment to purchase, until the end of September, an additional ¥15bn of CP and corporate bonds in total (as decided last month, the split will be determined by market conditions). Also unchanged was the Bank’s commitment to purchase an unlimited amount of JGBs as required to hit its 10Y yield target. The one new decision this month was to extend by one year – through to June 2022 – the deadlines for loan disbursements pertaining to the Bank’s long-standing “Fund Provisioning Measure to Stimulate Bank Lending” and the “Fund-Provisioning Measure to Support Strengthening the Foundations for Economic Growth”. As usual, the Bank’s forward guidance continues to indicate that it expects short- and long-term policy rates to remain at current levels or lower, as it will not hesitate to take additional easing measures if these are viewed as necessary (as might plausibly occur due to a worsening economic backdrop or a significant breakout strengthening of the yen).

There was always a very strong likelihood of stable policy today, especially with the Bank presently conducting a review of some aspects of monetary policy to be announced at the March meeting. And on that, Kuroda stated today that the yield curve control target would be one focus of the review, with the ‘balance between effects and side-effects’ to be studied, with all asset purchases and negative rates also to be in the spotlight. Given that ongoing review, and the unsurprisingly minimal additional clarity on it provided by Kuroda today, attention today was always going to be principally on the BoJ’s updated economic projections and the associated commentary. That said, appropriately the Bank notes that the outlook is “extremely unclear”, not least due to its dependence on assumptions made about the path of coronavirus and its impact on both domestic and overseas economies. For the purpose of producing its baseline forecasts, the Bank assumes that the impact of the coronavirus will wane gradually and largely disappear by the end of FY22, with no substantial impact on firms’ and households’ longer-term growth expectations or detrimental impact on financial intermediation or stability. So while the current situation remains “severe”, the Bank continues to hold the baseline view that economic activity will follow a moderate improving trend – thanks to the support provided by fiscal and monetary policy – while acknowledging that the resurgence of coronavirus likely to weigh in the near term, especially on the consumption of services.

As previously, exports and industrial production are assessed already to be in an upward trend. Moreover, probably reflecting the recent strengthening of machine orders, the Bank now sees signs that business investment is stabilising, with a pick-up – initially in the manufacturing sector – predicted to develop in due course. Given the outlook for activity, as the base effects from past shifts in global oil prices disappear, core inflation is forecast to return to modestly positive territory. However, inflation is expected to remain well below half of the 2% target throughout the forecast period.

With regard to Board members’ updated numerical forecasts, as had seemed likely, the median member now expects GDP to contract by 5.6% in FY20 – just 0.1ppt deeper than last time – with the favourable base effects from GDP revisions more than offset by the output losses that are expected to result from the current resurgence of coronavirus. Looking further ahead, the median member expects growth of 3.9% in FY21 and 1.8% in FY22 – up 0.3ppt and 0.2ppt respectively compared to the October forecast, primarily reflecting the additional fiscal stimulus announced late last year. The core CPI (excluding the impact of the consumption tax and free education policies) is expected to fall by an average of 0.6%Y/Y this fiscal year, before rising 0.5%Y/Y in FY21 and 0.7%Y/Y in FY22. The Bank’s prediction for both the current year and next is 0.1ppts firmer than forecast previously, while that for FY22 is unrevised. The Bank characterises these inflation forecasts – which we view as likely being too optimistic across all years – as “more or less unchanged”. Not surprisingly, the Bank continues to view the balance of risks to both activity and prices as lying to the downside.

Finally, it is worth noting that the Government has nominated Senshu University Economics Professor Asahi Noguchi to replaced Makoto Sakurai after the latter’s term ends at the end of March. Noguchi has links with the current Board, having co-authored a book with Deputy Governor Wakatabe. And he has also co-authored with established Abenomics fan and former Abe-adviser Koichi Hamada. So, if and when he is confirmed by Parliament, it seems unlikely that his appointment would shake up the BoJ.

Japan’s trade surplus narrows marginally in December as imports higher than expected
Turning to today’s Japanese economic data, the MoF released the merchandise trade report for December. The adjusted trade surplus narrowed unexpectedly to ¥477bn this month from ¥549bn in November, largely due to an upside surprise in imports. Export receipts were little changed in the month, falling a negligible 0.1%M/M. Even so, annual growth improved to 2.0%Y/Y – albeit slightly below market expectations – marking the first positive annual growth in more than two years. In the detail, exports of electrical machinery increased 6.6%Y/Y, but exports of general machinery were virtually unchanged from a year earlier and exports of other manufactured goods fell almost 2%Y/Y. Meanwhile, import values increased 1.3%M/M in December. Even so, imports values remained down 11.6%Y/Y – a smaller decline than the market had expected – not least due to largely price-driven declines in imports of energy products. Imports of manufactured goods fell 1.1%Y/Y, but this was the smallest decline since July 2019.

As usual, a little later in the day the BoJ released its analysis of the export and import data, adjusting the MoF’s statistics to remove the influence of both seasonality and changing prices. According to the BoJ’s analysis, following six-consecutive months of solid recovery, real exports declined 1.0%M/M in December. So while growth in November was revised up fractionally to 3.8%M/M, annual growth decreased 2ppts to 2.6%Y/Y in December. Even so, real exports rebounded a further 12.7%Q/Q in Q4 following a 13.2%Q/Q lift in Q3. Meanwhile, following three months of growth, the BoJ estimates that real imports declined 0.7%M/M in December. As a result, the annual decline in imports almost doubled to 3.7%Y/Y (still far less than the decline in values, which were impacted by lower prices for petroleum and chemicals). Nonetheless, real imports still increased 6.1%Q/Q in Q4 following an 8.1%Q/Q contraction in Q3. Taken together, the BoJ’s calculations imply that net merchandise exports will make a positive contribution to GDP growth in Q4, but one that is much smaller than the 2.9ppt contribution made in Q3.

The BoJ will release more details regarding the commodity breakdown and destination of these exports next week. In the meantime, the MoF’s own volume estimates indicate that growth in exports to China picked up to 15.4%Y/Y in December from 11.2%Y/Y in November. Exports to the rest of Asia increased 5.2%Y/Y, marking the strongest growth since May 2018, but exports to the US fell 3.4%Y/Y. Predictably, the situation with respect to European markets remained very weak, with the 18.4.8%Y/Y decline in exports in December almost twice as large as in November and the worst result since September.

BoJ Senior Loan Office Survey paints mixed picture of loan demand in Q4, lending standards easing at a slower pace
In other BoJ news, today the Bank also released its quarterly Senior Loan Officer Survey, which amongst other things provides information on how Japan’s largest banks are viewing the demand and supply of credit. With respect to lending to firms, a net 5% of respondents reported decreased loan demand over the past three months compared with the 14% of respondents citing increased demand previously. This result, driven by the responses of large firms, points to relatively weak economic conditions (of course, while loan demand was strong through the middle of last year, this was driven by economic stress and liquidity requirements rather than the need to fund investment). Unsurprisingly, the most commonly reported drivers of increased business loan demand were a decline in internally-generated funds or reduced availability of funding from other sources, whereas there was a range of factors contributing to decreased loan demand. Looking ahead, a net 10% of respondents forecast an increase in loan demand by firms over the next three months, but the survey is silent on what factors would drive that demand. Elsewhere in the survey, lending standards appear to be stabilising with slightly fewer banks reported an easing of credit standards on business loans compared with the prior survey. This was especially so with loans to small firms, where the share of banks easing standards fell to 10% from 16% previously. Where standards were eased, this reflected both competitive pressures and banks’ effort to stimulate growth. Looking ahead, respondents expect to ease credit standards further over the next three months, in similar numbers to that recorded over the past three months.

Meanwhile a net 12% of respondents reported increased loan demand from households over the past three months, up sharply from the net 3% of respondents that had reported an increase in the previous survey and the strongest result since 2016. The increase was driven by a further recovery in demand for housing loans, with 14% of respondents seeing increased demand compared with 7% previously. A net 3% of respondents reported increased demand for consumer loans, comparing favourably with the 13% who had reported reduced demand in the prior survey. Looking ahead, a net 6% of respondents forecast that loan demand by households would decline over the next three months, probably reflecting the resurgence of coronavirus cases and associated restrictions. As far as the supply of credit is concerned, the share of banks easing credit standards on household loans was unchanged at 8%, with slightly fewer anticipating that credit standards would ease further over the next three months.

ECB announcements to be uneventful; euro area consumer confidence due
Today’s conclusion of the ECB’s latest Governing Council meeting is likely to be uneventful, not least given last month’s decision to extend its monetary policy support into 2022. There will clearly be no change to any of the main policy parameters or forward guidance. So, the focus of the post-meeting press conference is likely to be the economic outlook, not least in light of the recent intensification of the spread of Covid-19 and extension of national lockdown measures, including this week’s announcements from Germany. Not least given the record weakness in inflation of non-energy industrial goods confirmed in yesterday’s consumer price data, we expect the ECB to reiterate that it will “continue to monitor developments in the exchange rate with regard to their possible implications for the medium-term inflation outlook”. Judging from Christine Lagarde’s comments last week, however, she will insist that the ECB’s economic projections, published last month, remain credible.

Given the pandemic, however, the ECB’s forecast of positive GDP growth in the current quarter appears a little overoptimistic. Indeed, we expect this afternoon’s flash Commission estimate of consumer confidence to fall back again having risen to a three-month high in December. Slow progress implementing vaccine programmes also poses a risk to the outlook for later in the year. Nevertheless, this morning’s French INSEE business survey suggested a marginal improvement in conditions this month, with the headline sentiment indicator rising 1pt from December to 92, still, however, well below the long-run average of 100. The improvement largely reflected better conditions in manufacturing with minimal change reported in services or retail.

Industry and credit conditions surveys due in the UK
The data focus in the UK today will be survey indicators, with a focus on manufacturing and the banks. The CBI industrial trends survey for January will provide an update on the former sector, where output is likely to fall at a modest pace in Q121 as the impact of Brexit-related stock-building wears off and firms face up to the new non-tariff barriers imposed to trade with the EU. Optimism related to the economic outlook will, however, likely remain supported by the rollout of the Covid vaccine. Separately, the BoE will publish its Credit Conditions Survey for Q420.

Housing starts, Philly Fed survey and jobless claims ahead in the US today
Following yesterday’s further pullback in the NAHB housing index – which nonetheless remains at a historically high level – today brings news on housing starts and building permits for December. Daiwa America Chief Economist Mike Moran expects starts to be little changed this month, with a possible decline in single-family starts from November’s 13-year high perhaps offset by an increase in multi-family starts, where permits jumped last month. The Philadelphia Fed’s manufacturing survey for January is also released today, while the weekly jobless claims report will also be of interest after initial jobless claims hit a five-month high last month. Aside from the data, the focus will be on Washington DC, with President Biden expected to hit the ground running with the signing of further executive orders to try to contain the worsening pandemic (yesterday he signed an order making the wearing of face masks mandatory on federal property, as well as laying the groundwork for the US to re-enter the Paris climate accord).

Australian employment posts another strong gain, dropping the unemployment rate to 6.6%
The key focus in the Australia today was on the labour market, with the ABS releasing the Labour Force survey for December. Given the very strong rebound in job vacancies and job ads, analysts were looking for a strong report and these expectations were not disappointed. Employment grew a further 50k – building on an unrevised 90k gain in November – so that the annual decline eased to 0.5%Y/Y. Indeed, employment is now just 93k below where it stood in February, having increased almost 785k since the low-point reached in May. Encouragingly, the bulk of the growth in December was again in full-time employment, which increased almost 36k to the highest level since March (albeit still down 125k since February). Part-time employment increased 14k in December and is now 32k above the pre-pandemic level.

While employment increased 0.4%M/M in December, aggregate hours worked increased a minimal 0.1%M/M – albeit following an impressive 2.5%M/M increase in November – also to the highest level since March (but still down 1.5%Y/Y). In part, the increase in employment was made possible by a further 0.1ppt increase in the labour force participation rate to a record 66.2% (the employment participation rate remains around 0.8ppts below the pre-pandemic level, however). However, employment growth was sufficient to lower the unemployment rate by a larger-than-expected 0.2ppts to an 8-month low of 6.6% – now almost 1½% below the 8% rate that the RBA had forecast for the end of the year. Needless to say, this should please the RBA’s Board, which views lowering the unemployment rate as an important national priority. Even so, the unemployment rate remains around 2ppts above the Bank’s assessment of the full employment level and the inflation rate remains far below the Bank’s target range. So while further policy easing does not appear necessary or likely at this stage, policy tightening – at least as far as raising the cash rate is concerned – remains unlikely until some stage in 2023 at the earliest.

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