BoJ leaves policy settings unchanged

Chris Scicluna

After Wall Street inched up to new highs, Asian equities are mixed today while the BoJ provides no surprises
Ahead of a very large number of earning reports, a rally in technology stocks helped nudge the S&P500 to a modest 0.2% gain on Monday – thus eking out a new record high – while the Nasdaq climbed 0.9%. Both bond and currency markets were quiet, with the 10Y UST nudging up just 1bp to 1.57% and the greenback was little changed despite news of a less impressive than hoped for lift in durable goods orders in March.

Today’s Asian-Pacific session has been reasonably low-key, especially with the BoJ providing no surprises following its latest Board meeting or in the accompanying Outlook Report (see below). Kuroda’s press conference is now underway, but so far his comments have been plain vanilla and it’s hard to believe that he’ll provide anything to change the mood significantly. Indeed, the overall tone in Japan’s markets today was not upbeat, with the TOPIX declining 0.8% despite the BoJ slightly revising up its forecasts for activity. JGBs were little changed even as the upgraded forecasts seemingly reduce the already small chance of the Bank delivering further policy easing. In China, the CSI300 is currently up just 0.1%, while other bourses in the region are showing a mix of modest gains or declines.

Today’s European and US economic dataflow is unlikely to provide the market with much direction, but there are a large number of corporate earnings reports ahead in the US (Microsoft and Alphabet being of particular note). After that, attention will surely turn to the Fed’s FOMC meeting and President Biden’s address to a joint session of Congress (albeit with attendance limited due to pandemic safety protocols).

BoJ leaves policy unchanged, as expected, lifts forecasts for activity but inflation still expected to be just halfway to target in FY23
As had been widely expected, after tweaking the operation of policy last month as a result of its review of monetary policy, this month the BoJ’s Board left all dimensions of its policy unchanged. So its short-term policy rate was left at -0.1%, and the 10Y JGB yield target was left at 0%, with only the usual one dissenter to the decision from among the nine Board members (Kataoka, who wants short and long-term interest rates lowered further). 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. Also unchanged was the Bank’s commitment to purchase an unlimited amount of JGBs as required to hit its 10Y yield target. 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 necessary (perhaps due to developments in coronavirus further delaying prospects for recovery).

Predictably, attention today was always going to be principally on the BoJ’s Outlook Report, which contains updated economic projections and commentary, including the Bank’s first forecasts for FY23. With regard to Board members’ updated numerical forecasts, with the economy having performed slightly better than expected, the median member now expects GDP to contract by 4.9% in FY20 – a 0.7ppt smaller contraction than forecast in January despite the winter resurgence of coronavirus. Looking ahead, starting from a situation that the Bank still regards as severe, the median member expects growth of 4.0% in FY21 and 2.4% in FY22 – up 0.1ppt and 0.6ppt respectively compared to the January forecast, while the first forecast for FY23 is for growth to slow to a still above-trend 1.3%. That forecast recovery is underpinned by the assumption that the negative impacts of coronavirus will wane as vaccination proceeds, while the economy is expected to be supported by growth in external demand, accommodative financial conditions, the government’s fiscal measures, an intensifying ‘virtuous circle from income to spending and an uptrend in investment spending, mainly on machinery and digital technology.

Despite the more positive growth backdrop, the BoJ’s forecast measure of the core CPI (which excludes only fresh food) is now forecast to increase just 0.1%Y/Y in FY21 – down from 0.5%Y/Y previously – weighed by the impact of expected declines in mobile phone calling fees. It is worth noting that the Bank’s forecast is based on the current 2015-base index, and that the rebasing of the CPI scheduled for August will result in revisions from January 2021 onwards that are likely to lower inflation due to the greater weighting of mobile phone charges in the 2020-base index. Looking further ahead, the median Board member now forecasts core inflation to lift to 0.8%Y/Y in FY22 – just 0.1ppt higher than forecast in January – while the first forecast for FY23 is that inflation will edge up further to 1.0% (sadly, even the most optimistic Board member only sees inflation at 1.2%, whereas the most pessimistic member sees inflation at 0.6%). Of course, this would still leave inflation at just half of the current target rate at the end of BoJ Governor Kuroda’s term.

Fittingly, the Bank notes that the outlook is “highly 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 again assumes that the impact of the coronavirus will wane gradually and mostly disappear midway through the forecast period, with no substantial impact on firms’ and households’ longer-term growth expectations or detrimental impact on financial intermediation or stability. Not surprisingly, for the time being it considers that the risks to activity are skewed to the downside, likely not least due to the recent further resurgence of domestic coronavirus cases and associated restrictions on activity. However, from about the middle of the projection period, the Bank views the risks to activity as generally balanced. Unfortunately, but appropriately given its past undue optimism, the risks to inflation are considered to be skewed to the downside throughout the forecast period.

BoJ’s underlying inflation measures remain weak in March
In other Japanese news, following Friday’s release of national CPI figures for March, today the BoJ released its underlying inflation measures for the month. The 10% trimmed mean, which the BoJ regards as best correlated with the state of the economy, increased 0.2ppt to 0.0%Y/Y, thus moving out of negative territory for the first time since October. The weighted median lift in prices was steady at 0.1%Y/Y, as was the modal increase. Meanwhile, the net proportion of items recording a price rise over the past year edged down to 12.0% – still running at just half the pace seen prior to the pandemic.

China’s industrial profits rebound 92.3%Y/Y in March
The only news in China today concerned industrial profits in March, which predictably produced some hefty annual growth rates in light of the pandemic-induced decline in profits reported a year earlier. Total industrial profits increased 92.3%Y/Y, following a 34.9%Y/Y slump a year earlier. Perhaps more meaningfully, profits increased almost 21% compared with March 2019. Given the March result, over Q1 as a whole profits rebounded more than 137%Y/Y after declining almost 37%Y/Y previously, led by a near 158%Y/Y increase in the manufacturing sector.

Italian economic confidence and UK retail survey results ahead in Europe today
On what should be a quiet day ahead for euro area economic news, the most notable new data will probably come from Italy, where the ISTAT economic sentiment indicators for April are due. The manufacturing index is expected to suggest strongly that firms in that sector are increasingly optimistic, with the headline index forecast to rise from 101.2 in March to above 102, which would be the highest since the first half of 2019. Sentiment in services should also improve as pandemic containment measures gradually started to ease from yesterday. Likewise, the consumer confidence index is also expected to edge up this month, albeit remaining below the pre-Covid level of 110.8. Meanwhile, in the UK, the CBI distributive trades survey for April will give insights into the strength of retail and wholesale activity this month. With Covid containment measures gradually easing – and non-essential stores having reopened from the twelfth of this month – the survey should point to further strong growth in sales this month to take the level back within the range of the second half of 2020.

More economic data and earnings news in the US today as investors await tomorrow’s Fed announcements
As investors await tomorrow’s FOMC meeting, as well as President Biden’s first presidential address to a joint session of Congress, today will bring the release of the Conference Board’s consumer survey for April, which like the University of Michigan survey should find households in a more positive mood. Of equal interest will be developments in the survey’s labour market indicators to see whether they confirm the improvement seen in the jobless claims count over the past fortnight. The Richmond Fed’s manufacturing survey and home price reports from the FHFA and S&P/Corelogic are also of note, while an absolutely huge day for corporate earnings includes market heavyweights such as Microsoft, Alphabet, Visa and General Electric.

Australia’s ANZ Roy Morgan consumer sentiment index eases slightly
After reaching a post-pandemic high earlier this month, the ANZ-Roy Morgan consumer confidence index eased 1.4%M/M to 112.4 last week, thus declining modestly

For a second consecutive week. Most the declined owed to a slightly less positive assessment of the general economic outlook, even as respondents thought the environment more favourable for buying major household items. 

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