The BOJ is wary of a hit to consumption as inflation rises and real wages decline.
The Bank of Japan is likely to call an end to its special measures to facilitate financing of smaller firms at its Sept. 21-22 policy meeting, as it stands pat on monetary policy in the face of continuing economic weakness.
While officials are monitor rising inflationary pressures due to higher food prices and while a slide in the yen to a 24-year low against dollar could potentially raise political pressure on the Bank to act, the BOJ’s board will likely maintain an easing bias given that the output gap is in negative territory. Fears over downside risks to the economy could even prompt the bank to tweak guidance for “short- and long-term policy interest rates to remain at present or lower levels.” (See MNI INSIGHT: Yen at 150 Would Put Pressure On BOJ).MNI STATE OF PLAY
Officials worry that private consumption, which has recovered from pandemic lows, will lose momentum amid a drop in real incomes caused by rising inflation.
But the government’s recent decision not to extend its facility to support smaller firms’ financing provides an opportunity for the BOJ not to extend its own support programme. The government’s special measures are set to end on Sept 30 (See MNI INSIGHT: BOJ Likely To End Special Measures After Govt Move).
Covid-related corporate fund demand remains stable, while demand for funding related to rising costs remains strong. Bank officials believe commercial banks can lend to firms without the BOJ backed-financing measures.
The board is expected to upgrade its assessment on exports and industrial production following recent data showing a recovery from a weaker April-June period caused by lockdowns in Shanghai. Bank economists are wary of the impact of ongoing semiconductor shortages and a slowing in global growth.
"Exports have continued to increase as a trend, but they have been affected by supply-side constrains, and industrial production has been under strong downward pressure due to the effects of such constrains," the last forward guidance showed.