Societe Generale On Today’s BOJ Decision

Societe Generaleexpect the "BoJ policy board to maintain the current easing framework. The board will likely decide to continue to apply a negative interest rate of -0.1% to part of the current account balance and to maintain the long-term (10yr) JGB yield target at around 0.0%. We also expect the asset purchase programme framework to remain unchanged, with the BoJ ready to buy an unlimited amount of JGBs if necessary. The BoJ will likely maintain its easing bias and continue to emphasise the stance that "the Bank will closely monitor the impact of COVID-19 for the time being and will not hesitate to take additional easing measures if necessary."

• PM Abe's resignation has kindled speculation about whether the current easing framework will change under the new prime minister. However, we think that the BoJ and government's commitment to achieve the 2% inflation target, as stated in the joint policy statement in 2013, has not changed. Governor Kuroda's term lasts until April 2023. Thus, PM Abe's successor will not be able to change the leadership of the BoJ for some time. Furthermore, all the current policy board members have indicated their support for the current easing framework. The next government would therefore face a considerable hurdle if it wanted to change the composition of the policy board to create the majority needed to alter the current policy framework. Thus, we think that PM Abe's resignation will not have any material impact on the BoJ's commitment or on the direction of its easing policies over the near term.
• The positive effects of the series of economic support programmes implemented by the government and BoJ to cushion the effects of COVID-19 remain strong. Japan's credit cycle is still on an upswing, as confirmed by the July BoJ Tankan survey. The capex cycle likewise, with private non-residential investment as a percentage of GDP remaining above 16% in the latest GDP reading. The labour market also remains resilient with the unemployment rate still below 3% and signs emerging of job seekers returning to the labour force. Thus, for the moment, an L-shaped recovery appears to have been avoided. In light of such evidence, we think the BoJ policy board will maintain the view that policymakers have done enough for now and that it should monitor the effects of the policies implemented so far before taking any further action. We expect no major change to the BoJ's economic assessment or outlook at the September policy meeting.
• It is also still our view that the economic fundamentals remain resilient despite the impact of COVID19 lasting longer than we had anticipated at the onset of the pandemic. The BoJ is likely to consider that the need for additional easing or support has not risen over the past few months. However, the BoJ policy statement and subsequent statements by policy board members are likely to underline that the bank is carefully monitoring the situation and ready to act with further easing if deemed necessary to dispel any fears that could form in market. With data continuing to indicate that an L-shaped recovery has been avoided, the likelihood remains strong that a U- or V-shaped recovery will materialise rapidly once the COVID-19 situation calms down."