Is the Bank of Japan (BOJ) expected to shift course in its bond purchase programme?

Reuters News reported on February 12, 2014 that one of Bank of Japan’s (BOJ) board member, Mr. Takahide Kiuchi was quoted by a prominent Japanese newspaper, the Nikkei Weekly, as saying that if the central bank were to continue to increase its monetary stimulus at a rate of Japanese Yen (JPY) 7.5 trillion (USD 73.0 billion) of long-term government bonds per month, the expected costs from the stimulus might outweigh the benefits. The Japanese Yen currency has weakened to around 101 to 102 to the US Dollar, but the Nikkei 225 has not been showing much improvement since the beginning of the year, down by approximately 6.0 percent, and entered a correction phase last week trading at around 14,000 down from the 2013 year end figure of around 16,000 levels. The economy has also been showing some signs of slowdown in growth figures, which according to the latest International Monetary Fund (IMF) global economic forecast for 2014 could show an overall dismal annualised growth rate at around 1.7 percent, as compared to neighbouring South Korea, where annualised economic growth forecast for 2014 is for 4.0 percent.

Separately, machinery orders data for the month of December 2013 were released during early Asian trading, Feb 12 (Hong Kong/Singapore time) which showed a worse than expected contraction of 15.7 percent month-on-month, where the prior month (November 2013) saw an increase of 9.6 percent. On a year-on-year basis, machinery orders rose by only 6.7 percent, missing all the estimates. The machinery orders data coming out of Japan is a leading forward indicator of business confidence, and capital expenditures of many Japanese industrial corporations. The data appeared to be pointing a slowdown in manufacturing spending which can be quite troubling in driving the entire Japanese economy out of its decades-old recession. The slowdown in machinery orders might also impact the employment outlook for Japan, as thousands of college graduates are expected to complete their education in March, and will start to look for jobs.

The question on many investors’ minds will be whether the Bank of Japan is ‘over’ stimulating the economy to the point that it does not make sense for businesses and consumers to have a weakened Yen, amid global price increases. As illustrated in my previous articles discussing on the state of economy in Japan, the current account data released earlier this week showed a weakened exports data, coupled with higher energy costs needed to supplement the shortfall as a result of the shutdowns of many nuclear power facilities. The weakening Japanese Yen has no doubt result in rising costs, with key core consumer price index, ex food energy rising gradually to 1.3 percent last month, and inching closer to BOJ’s overall inflation target of 2.0 percent. However, the consumer-driven inflationary figures have not translated to higher wage levels among Japanese employees, who are struggling to cope with the declining Yen currency, along with a slowdown in wage growth.

In the Jan 12 Reuters article, Mr. Kiuchi was quoted as saying that he will like to propose that the BOJ alter its inflation goal of 2.0 percent due to the concerns that the two-year time frame set for 2015 might not be met. The year 2015 will also be seeing the consumption tax to increase from the 8.0 percent which is scheduled to be implemented in April 2014, to 10.0 percent by October 2015. The BOJ governor, Mr. Haruhiko Kuroda, has also mentioned that he hopes to see that the 2.0 inflation target will be reached on or before October 2015. However, despite the rise in core consumer price indexes slowing rising, most of the inflation effects are brought on by high energy costs without corresponding increases in wages needed to cope with the price hikes. This is quite troubling when consumer spending levels are likely to fall post April 2014 due to the income shortfalls many Japanese households are facing.

The comments provided by Mr. Kuichi, and a prominent BOJ board member point to some disagreement within the inner circles in BOJ. However, the overall monetary stimulus policy programme led by Mr. Kuroda is unlikely to be altered, but it does point to the growing drift among BOJ policy makers as to whether the overall massive injections of liquidity into the Japanese financial system have helped to boost production output, increase spending, and drive other economic activities that lift Japan out of its recessionary woes.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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