Ahead of BoJ emergency policy meeting

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By: Andria Pichidi

Focus will now shift to the BoJ monetary policy statement and press conference, where there have been reports the Bank may up its JGB and corporate bond purchases. 

Japan reported this week preliminary Q1 GDP,along with April trade data, while tonight it will report April national CPI. The data so far are ugly. The PMIs for Japan showed predictably sharp contractions for manufacturing along with a deeply contracted but improved reading for services. Japan prelim May PMI for manufacturing fell to new post-2009 low. Japan exports were also weak, down by the most since the 2009 crisis.

It looks as though data will show the economy has dropped back into recession and is losing its hard fought fight against deflation. Japan PM Abe has already started to lift the state of emergency for most of the country (stay-home policies were voluntary), though Tokyo and Osaka will remain largely shuttered over fears of a wave of infections in the densely populated areas. Nevertheless, his announcement that emergency restrictions will be lifted sooner than the previously slated May 31 date was cheered by the stock market.

For tomorrow meanwhile, the BoJ is expected to hold interest rates unchanged at -0.1%, without any significant change in the existing monetary policy. They will likely just use the meeting to communicate the details of the new scheme if nothing else and in general to discuss its efforts to supply funds to financial institutions.

In the previous meeting, on April 27, the BoJ delivered on expectations, announcing that the policy rate was left at -0.1% and the JGB purchases will be unlimited (formerly capped at Y80 tln per year) while also announcing an increase in corporate bond and commercial paper. The JGB had announced a wide ranging set of measures to ensure adequate liquidity supply and a tight yield curve as virus restrictions hit the economy. The rules for the corporate bond and commercial paper purchases were lifted and the type of assets it accepts as collateral was expanded to meet targets. State-affiliated financial institutes will now be eligible for the loan program.

Earlier this week meanwhile, amid the ensuing risk-off theme, the governor of the BoJ re-emphasized their “do what it takes” mantra, which followed Fed chair Powell’s grim warning of an “extended period” of weak economic growth, citing concerns about how long it may take for a vaccine to be ready and widely available, and how well future outbreaks of the virus could be contained. On the 11th of May, the BoJ’s “Summary of Opinions” from its late-April policy meeting noted a consensus concern about downside risks to the prospects of economic recovery. There seems good reason for markets, having been pricing-in a phased reopening from lockdown across global economies, to pause at some point, to wait and see how the loosening-up process goes. Should such a theme take a grip, this would underpin the Yen.

BoJ’s moves are designed to combat the impact of the Covid-19 pandemic with the economy expected to remain in a severe situation for the time being and inflation to fall back to -0.7% to -0.3% in the 2020/2021 fiscal year, according to the latest JGB projections.

Hence, the government of Prime Minister Shinzo Abe is now focused on preventing the pandemic from creating a surge in bankruptcies and job losses through relief measures and emergency credit. The government enacted an emergency relief program equivalent in size to 20% of GDP on April 30. It is set to propose a second relief program this month, hoping to get it enacted by mid-June. The BOJ’s next scheduled policy meeting is slated for June 15-16.


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