MNI PREVIEW: BOJ Set To Hold; Pace Of Recovery A Concern

The Bank of Japan is set to stand pat on monetary policy at the September meeting, as the domestic economy is seen recovering moderately after the record contraction in Q2, although policymakers will highlight downside risks amid signs the bounce back may be slower than expected.

The BOJ will use the 2-day meeting, which ends Sept 17, to examine the transmission of current policy and how its impacting both the pace of the recovery and the outlook amid lingering concerns over the Covid-19 pandemic.

Policymakers will likely underline their view that exports and industrial production are on the comeback and will likely remain solid in Q3. They will also point to the strength of private spending in recent months, underpinned by pent-up demand and the government's cash distribution, although they could warn that spending is seen losing momentum.

The board will look at whether there will be a need to lower its forecasts for full-year growth in the October outlook update on the back of the risks it sees, lowering it from the 4.7% contraction it forecast in the July report.

TANKAN SURVEY

There is a slew of data that the Bank will have at its disposal between now and the October meeting, including the September Tankan business survey and the outcome of the quarterly BOJ branch managers' meeting.

Although much economic activity has resumed for both firms and households, the overhanging Covid concerns and self-imposed social distancing are still acting as a drag on the recovery, but the BOJ is still basing assumptions on the basis of no full-scale return of the virus and the impact on the economy.

The BOJ decision comes the day after the Federal Reserve policy decision. Although officials at the BOJ expect the Fed to move to strengthen forward guidance in coming months, they don't expect the move to come at the September meeting, as they see the current 'lower for longer' message as well understood by financial markets.

BOJ officials don't expect the Fed's policy decisions this month to fuel a rapid rise for the yen over coming weeks.