Flash Notes - UOB

Alvin Liew [email protected] Global Economics & Markets Research Email: [email protected] URL: www.uob.com.sg/research

Thursday, 16 March 2017

Flash Notes

Japan Mar 2017 MPM: Keeping Status Quo Again The Bank of Japan (BOJ) as widely, kept its monetary policy unchanged in its March monetary policy meeting (MPM) decision today (16 Mar). This was status quo for the fourth straight meeting after having announced policy changes in two consecutive monetary policy decisions during July and September last year. As of writing (16 Mar, 11:30am SG time), the Nikkei 225 index traded a bit weaker by -0.13% (as opposed to the stronger US equity markets overnight), the 10-year JGB yield was slightly lower by 1.9bps at +0.078% while the USD/JPY was largely unmoved by the announcement at 113.45 (not materially changed from the pre-announcement level of 113.40). The BOJ decided to maintain the “New Framework for Strengthening Monetary Easing” made earlier in Sep 2016 MPM. The measures included: 1)

"Yield curve control" to its existing "Quantitative and Qualitative Monetary Easing (QQE)" and "QQE with a Negative Interest Rate" (again by 7-2 majority vote) of which: a. b. c.

2)

On the short-term policy interest rate: BOJ will keep the -0.1% the Policy-Rate Balance rate On the long-term interest rate: BOJ will buy Japanese government bonds (JGBs) so that 10-year JGB yields will remain at around 0%. With reference to the amount of JGB buying, the BOJ “will conduct purchases at more of less the current pace – an annual pace of increase in the amount outstanding of its JGB holdings of about 80 trillion yen – aiming to achieve the target level of the long-term interest rate specific by the guideline”

Maintaining the guidelines for asset purchases as announced in September 2016 MPM (also again by 7-2 majority vote) of which: a. b.

BOJ will buy JPY6trn of ETFs and JPY90bn of J-REITs annually BOJ to maintain its outstanding amount of CP at JPY 2.2trn and corporate bonds at JPY3.2trn

As with the MPMs in 2016 & Jan 2017, the March decision was not unanimous as board members Mr T. Sato and Mr T. Kiuchi dissented on various measures for various reasons.. BOJ Maintains Optimistic Economic Outlook While Inflation Outlook To Meet 2% Target Unchanged The BOJ still maintained its positive assessment that the “Japan’s economy has continued its moderate recovery trend” while the “overseas economies have continued to grow at a moderate pace, although emerging economies remain sluggish in par” (unchanged from Jan 2017 MPM) but downgraded its assessment on housing investment. The BOJ continued to sound optimistic about Japan economic growth outlook saying that “Japan's economy is likely to turn to a moderate expansion” on the back of optimism on demand from corporate & household sectors, government’s fiscal stimulus measures and stronger export demand. On the inflation front, the central bank did not say anything new as it noted that CPI inflation “is likely to increase from about 0 percent and become slightly positive, reflecting developments in energy prices. Thereafter, it is expected to increase toward 2 percent as the output gap improves and medium- to long-term inflation expectations rise.” The BOJ again qualified the outlook is accompanied by risks and the risks are due to uncertainty in overseas economies such as US monetary policy, China risks, UK Brexit and geo-political factor. There was no mention of any Japan domestic risk factor. 2017 BOJ MPM Outlook – We Still Expect More BOJ Easing In 2017 Amidst Exerting Authority On Yield Curve Control We still believe the BOJ has not reached its limits of what it could do in terms of monetary easing, but the concern continues to be whether the BOJ’s monetary policy is still effective. And while there is increasing market expectation that the next BOJ move is to taper its easing program, we think it is premature in 2017 because Japan is still far away from its 2% inflation target and it is inappropriate to debate exit of monetary policy easing at this early stage, just as Kuroda highlighted on many occasions in late 2016/early 2017. Thus, the most likely outcome for the BOJ may be to maintain status quo in the near term,

but we still expect more easing in later part of 2017 such as to push the Policy-Rate Balance rate to -0.2% (from -0.1% presently), accelerate it asset purchase program and may even include buying of other instruments. BOJ has surprised the markets with unexpected policy easing in 2016, and we cannot rule out policy surprises this year. On 17 Nov (2016), the BOJ announced its first operations to purchase an unlimited amount of Japanese government bond (JGB) in a bid to re-assert the central bank’s control of the yield curve (with the aim of maintaining the 10-year yield at “about” 0%). The unexpected BOJ move came after the global government bond rout post-US presidential election saw Japanese government bond (JGB) yields rising as well but not as sharply as US Treasury yields although the 10-year JGB yield returned to positive territory since 15 Nov 2016 after having languished in negative yield for most of 2016. Since then, the BOJ has carried out a few more such operations and going forward, it will likely continue to do so as to exert its authority on yield curve control (at “about” 0%), although BOJ Governor Kuroda has conceded (on 17 Nov 2016) it cannot achieve a yield target of exactly one level. The 10-year JGB yield is at 0.078% (as of 16 Mar 2017). The immediate event to watch will be BOJ Governor’s post-decision press conference later today (16 March, 2:30pm SG time). The next key data to watch will be the February trade data for Japan (22 Mar) followed by the flood of February data including CPI data at the end of the month (31 Mar). The next BOJ MPM will be on 26/27 April which is accompanied by an updated outlook report (The Bank’s View). Japan will pay close attention to President Trump’s US economic & foreign policy and European political developments which may hamper business investment & trade outlook. Closer to Japan, it will remain vigilant towards the developments in North Korea. FX Outlook – Trump’s Reflationary Policies and Monetary Policy Divergence Likely To Keep USD/JPY On Course For 120 by end-2017 After touching a recent high of 118.6 on 3 Jan (2017), the USD/JPY has since entered a consolidation phase given the disappointment in the lack of details into US President Trump’s “phenomenal” tax reform and infrastructure spending plans, leading to a broadly weaker US dollar. That said, we still believe two factors to strengthen the US dollar and lift the USD/JPY pair higher: 1) Trump’s reflationary/expansionary fiscal policies and 2) growing monetary policy divergence between the Fed Reserve and BOJ. We expect the pair to climb to 117 by mid-year and then to touch 120 by end-2017. The risk for the yen to strengthen in a risk-off environment could be due to potential geo-political events in Europe and unexpected radical policy announcement from Trump.

FX Outlook

16-Mar-17

End 1Q17F

End 2Q17F

End 3Q17F

End 4Q17F

USD/JPY

113.45

115.0

117.0

119.0

120.0

Source: Reuters, UOB Global Economics & Markets Research estimates Please click to access the 15/16 March 2017 BOJ MPM statement and the BOJ’s 2017 MPM Schedule

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