J.P.Morgan On Today’s BOJ Decision

J.P.Morgan expect the BoJ "will continue the wait-and-see stance. The amount of special operations to facilitate the COVID-19 financing jumped at the end of August, which exceeded the amounts for special operations in June and July, suggesting that the funding needs of firms remain under the slow recovery from the COVID-19 crisis. This strong demand for the funding still warrants monitoring, and at this MPM, the BoJ likely will stay in emergency mode.

• Beyond such lingering conditions of funding, the Japanese economy is on a recovery trend, and the BoJ likely will revise up its current assessment of the Japanese economy. But the Bank likely will not change its overall outlook, and see both upside risk for manufacturing and downside risk for services. On the other hand, inflation is subdued and the August BoJ core CPI (ex. fresh food & energy, consumption tax hike & free education), to be published after this MPM, likely will become negative on a year-on-year basis, for the first time since March 2017. But the BoJ expects the current weak CPI growth to continue only within this year, and likely will continue to think it is hard to push inflation from the monetary policy side as long as social distancing continues, so that the current weakness of CPI growth would not directly induce the heated discussion of BoJ action this time.
• Rather, when the BoJ projects growth and inflation until 2022 in the Outlook Report, we expect it will seriously discuss the economic and inflation outlook and its appropriate policy response by checking the strength of capex of firms, their pricing behavior, and their inflation expectations from the BoJ Tankan survey (the next one will be published on October 1). Under the limited room for further easing, we maintain our view that the BoJ eventually will be forced to strengthen its rate-path forward guidance, which is currently linked only to the COVID-19 situation, by linking to the inflation outcome in October at the earliest, or next January. We can guess the BoJ, before taking actions, wants to see the impact of the Fed's new action of adopting flexible average inflation targeting and expected related action. Only if the yen appreciates rapidly and persistently reflecting the expected reduction of the real yield differential, could the BoJ think of cutting the short-term policy rate, which should be a risk scenario, not a main scenario, after this MPM.
• Suga already said he will maintain the current relationship with the BoJ.
• In the future, the BoJ may start the review of monetary policy during the COVID-19 era, possibly in 2021. Deputy Governor Wakatabe said that although the BoJ had already made a comprehensive assessment in September 2016 (and adopted an inflation makeup policy with an inflation overshooting commitment like the Fed's current policy framework and the yield curve control), the BoJ deems it necessary to give further consideration to what kind of monetary policy should be applied in the COVID-19 era while referring to the discussions of other central banks."