BoJ extends pandemic support measure

Chris Scicluna

Treasury curve bull flattens and commodities weaken; mixed day in Asia with no material surprises from the BoJ
As it turns out, Wednesday’s post-FOMC sell-off proved very short-lived, with the Treasury curve bull flattening aggressively on Thursday. At the close the 10Y UST had fallen 7bps to 1.50%, essentially erasing its post-FOMC move, while the 30Y UST fell 12bps to a four-month low of 2.09%. The reflation trade was also nowhere to be seen in the commodity space, with energy and metals moving decisively lower (copper futures hitting a two-month low). Despite the reversal, the S&P500 closed with a negligible loss on Thursday, even as the Nasdaq rallied 0.9% to a fresh record high. And after being boosted by the rise in yields on Wednesday, the greenback made further gains even as yields reversed course, albeit losing ground against the yen.

Since the close, US equity futures have firmed roughly a tenth or so while the 10Y UST is still close to 1.50%. Against that background, it has been a mixed day in Asia-Pacific equity markets. In Japan, the TOPIX has fallen 0.9%, with early modest losses extending after the lunch break as trading resuming following the BoJ’s policy meeting. That said, with JGB yields steady, the losses likely had little to do with the BoJ, which held policy settings steady while also announcing a six-month extension of its special pandemic lending scheme to banks. The BoJ also announced a new climate change focused lending scheme – likely to begin later this year – but this will replace a more than decade-old measure that had aimed to strengthen growth (more on the BoJ below).

As we write, stocks are trading little changed on the day in mainland China, but have firmed in Hong Kong. In the Antipodes, the ASX200 has advanced 0.5%, led by strong gains in technology stocks, even as energy and materials were dragged lower by declines in commodity prices. But both Aussie and Kiwi bonds have underperformed the sizeable rally in USTs, with investors continuing to digest the implications of yesterday’s strong local data. So, with one of the large local banks bringing forward its forecast for the first RBA rate hike to Q123, the 10Y AGCB rallied just 4bps to 1.60% while the yield on the 10Y NZGB closed almost unchanged at 1.77%.

BoJ leaves key policy settings unchanged; extends pandemic support measure until end of March 2022; announces a new climate change fund-provisioning measure, likely to start this year, albeit replacing a measure set to expire in June 2022
As widely expected, this month the BoJ’s Board left all of its key policy settings unchanged. So its short-term policy rate was left at -0.1%, and the 10Y JGB yield target was left at 0%. The vote was 7-1, with Kataoka (who wants short and long-term interest rates lowered further) maintaining his usual dissent and outgoing Board member Masai (whose term ends on 29 June) abstaining from the vote in light of her plans to move to the private sector. In addition, the upper limit for the Bank’s purchases of ETFs (about ¥12trn) and J-REITS (about ¥180bn) was unchanged, as was the Bank’s commitment to purchase, until the end of March, an additional ¥15bn of CP and corporate bonds in total (the vote was 8-0, with Masai also abstaining from this vote). Also unchanged was the Bank’s commitment to purchase an unlimited amount of JGBs as required to hit its 10Y yield target (albeit with actual purchases running at just a fraction of that seen at the beginning of QQE). As usual, the Bank’s forward guidance indicates that it expects short- and long-term policy rates to remain at current levels or lower. While the Bank’s actions during the pandemic suggest otherwise, it again claimed that it will not hesitate to take additional easing measures if necessary.

In other decisions announced today, the Bank elected to extend its special coronavirus lending programme, which provides cheap funding for financial institutions to on-lend mainly to SMEs. This programme had been scheduled to expire at the end of September, but has now been extended by six months until the end of March 2022 (the vote was 8-0, with Masai also abstaining from this vote). With the pandemic continuing to weigh on the economy, most commentators had expected such an announcement at either this Board meeting or the next. Meanwhile, the BoJ announced that it will soon launch – likely within 2021 – a new fund provisioning measure to succeed the Fund-Provisioning Measure to Support Strengthening the Foundations for Economic Growth, which will be allowed to expire at the end of June 2022 (it had been originally introduced way back in 2010 as the economy emerged from the GFC). This new measure – which the BoJ will outline in more detail at the next meeting in July – will provide funds to financial institutions for investment or loans that they make to address climate change issues (as judged by the institutions themselves, rather than the BoJ). While this announcement had not been expected as soon as today, this new measure is not especially surprising with the BoJ, in common with many other central banks, commenting extensively of late on climate change issues. According to the BoJ, supporting the private sector’s efforts on this issue in a market-neutral manner will contribute to stabilising the economy in the long run, thus justifying the intervention and doubtless pleasing PM Suga.

As regards the economy, while activity has likely declined over the first half of this year, the BoJ maintains that the economy has ‘picked up as a trend”, with exports and industrial production increasing steadily and business investment rising amidst a lift in profits and business confidence. Private consumption was described aptly as ‘stagnant’, due to the impact of the pandemic on the consumption of services. Meanwhile, the Bank’s forecast measure of core inflation (i.e. ex fresh food) was characterised as ‘around 0%’ and inflation expectations as more or less unchanged. Looking ahead, while the pandemic will weigh on service sector for the time being, the Bank continues to expect the economy to recover, support by external demand and accommodative monetary and fiscal policy. So with the much-vaunted ‘virtuous cycle’ from income to spending expected to resume and then intensify, as usual the BoJ forecast that core inflation will rise gradually in the medium-term. The Bank will quantify the economic outlook when it publishes its updated Outlook Report at the conclusion of next month’s Board meeting.

Japan’s CPI modestly firmer than expected in May
In other Japanese news, as usual the national CPI report largely mirrored the indications from last month’s release of advance data for the Tokyo area, although both headline inflation and the key core measures proved a tenth stronger than surveyed market expectations.

After falling sharply last month due to a near 28%M/M decline in mobile phone call charges, the headline CPI index increased 0.3%M/M in seasonally adjusted terms, which caused annual inflation to increase 0.3ppts to an 8-month high of -0.1%Y/Y. After declining over the previous three months, prices for fresh food rebounded 1.7%M/M but were still down 5.2%Y/Y. As a result, the BoJ’s forecast measure of core inflation – which excludes fresh food – increased by a smaller 0.2%M/M. Annual inflation for this measure also firmed 0.2ppts to 0.1%Y/Y, marking the first positive reading since March 2020. Sadly, this owed to base effects associated with a rebound in energy prices, which increased a further 1.8%M/M – the fifth consecutive increase – lifting annual growth in prices to 4.2%Y/Y. Therefore, the BoJ’s preferred measure of core prices – which excludes both fresh food and energy – increased just 0.1%M/M, causing annual inflation to remain steady at -0.2%Y/Y. The narrower measure of core prices used overseas – which excludes all food and energy – also increased just 0.1%M/M, which lowered annual inflation by 0.1pts to -0.3%Y/Y.

Within the core, as indicated by the Tokyo report, mobile phone call charges fell a further 1.2%M/M in May. But with call charges declining, retailers hiked the price of phones by 5.4%M/M. Prices for education services and medical care and medicines increased 0.1%M/M, but prices for recreational services fell 0.4%M/M. Boosted by higher energy prices, goods prices increased 0.6%M/M in May and so were up 0.4%Y/Y. Industrial product prices increased 0.2%M/M and 1.5%Y/Y, but a lesser 0.6%Y/Y excluding the impact of higher energy prices. After falling 0.9%M/M in April due to the impact of the sharp increase in mobile phone call charges, services prices were unchanged in May. Even so, annual inflation in the services sector – which had turned positive in March for the first time in 15 months – fell 0.1ppts to -0.7%Y/Y.

So in summary, in contrast to the situation in most industrial countries, inflation remains essentially non-existent at the CPI level in Japan. Indeed, while the BoJ might like to characterise core inflation as being mildly positive after excluding the impact of decline in mobile phone charges, the BoJ’s own measures of underlying inflation report that the trimmed mean – next updated this coming Tuesday – stood at -0.1%Y/Y in April and has been at least fractionally negative since July last year.

Contrary to expectations of further growth, UK retail sales drop in May, albeit remaining well above March and pre-pandemic levels
Following extremely strong growth (9.2%M/M) in April as non-essential stores reopened, UK retail sales slipped back 1.4%M/M contrary to expectations of further growth. Nevertheless, that still left sales 9.1% above the pre-pandemic level in February. And the average level of sales in the first two months of Q2 was more than 12½% above the Q1 average. The biggest contribution to the drop in May came from food stores, where sales fell 5.7%M/M, seemingly hit by the reopening of restaurants and bars, albeit remaining about 2½% above the pre-pandemic level. In contrast, non-food store sales rose 2.3%M/M to be 8.0% above the pre-pandemic level, with household goods stores reporting growth of 9.0%M/M. With greater mobility, sales at petrol stations rose 6.3%M/M to the highest level since February 2020, albeit remaining only slightly less than 5% below that benchmark. But having leapt almost 70%M/M back close to the pre-pandemic level in April, however, clothes sales slipped back 2.6%M/M in May, perhaps weighed by inclement weather. The share of sales conducted online fell 1.4ppt to 28.5%, albeit with the level of such activity still 58.8% above that ahead of the pandemic. In contrast, in-store sales remained some 1.3% below the February 2020 level.

German PPI again beats expectations, up to 7.2%Y/Y, highest since 2008
German PPI inflation continues to exceed expectations, rising 2.0ppts in May to 7.2%Y/Y, the highest since October 2008. On a monthly basis, prices rose 1.5%M/M, the most since July 2008. Pressures in prices of intermediate items remained significant, rising 2.2%M/M to be up 10.7%Y/Y with significant gains in prices of metallic items, including steel, basic chemicals and lumber. Base effects and the impact of the German carbon pricing scheme saw energy prices rise 2.6%M/M and 14.9%Y/Y. But inflation of capital goods (just 0.2%M/M and 1.2%Y/Y), and durable (0.1%M/M and 1.7%Y/Y) and non-durable consumer goods (unchanged on the month to be up just 0.5%Y/Y) remained seemingly unperturbed by supply bottlenecks and associated rising input prices suggesting that the current high overall rate of producer price inflation will remain transitory. Indeed, base effects suggest that May could represent the peak.

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