Japan imposes tighter monetary policy

The Bank of Japan prepares to counter the 0.1% slowdown in monetary base and reaccelerate growth by taking on a more conservative approach.

With the pickup in GDP growth, deflation is moderating but business sentiment remains fragile and inflation numbers are still far from the central bank’s target of 1%. 

Here's more from the DBS Group Research: 

The Bank of Japan is expected to keep policy unchanged today. The high-frequency data including industrial production, retail sales and housing starts have broadly improved during the Jan-Feb period, indicating a significant rebound in real GDP growth to about 3% QoQ saar in 1Q. On the price front, deflation also appears to be moderating, thanks to the pickup in GDP growth, rises in oil prices and depreciation of the yen. Headline CPI registered 0.3% YoY in February, the highest over more than half a year. Core CPI excluding food and energy also turned less negative to -0.5% YoY (vs. -0.8% in Jan).

Notwithstanding some improvements in the domestic economy, the BOJ may not rush to upgrade its assessment of the economic outlook ahead. Business sentiment remains fragile, as suggested by the weakness in the latest Tankan survey for 1Q. Inflation numbers are also far from the central bank’s target of 1%. The BOJ will most likely keep the door open to ease policy further.

When watching the BOJ’s daily operations of fund supplying, we noted that the growth of monetary base has slowed sharply to 0.1% YoY in March from 13.6% in Jan-Feb. The year-on-year slowdown was distorted, as the BOJ aggressively expanded asset purchase in Mar11 following the earthquake disaster. As of Mar12, the BOJ has injected a cumulative JPY 49trn under the asset purchase program (including special loans), and the remaining funds to be used by the year-end will amount to JPY 16trn. Holding other factors constant (without considering the expiration of traditional fund supply measures), growth in monetary base is estimated to reaccelerate on the YoY basis from May and average at 7% in the whole year of 2012. This will mean a tighter monetary policy compared to 2011 (base money growth: 15%), in line with the recovery in economic growth and prices from last year’s natural disasters. Monetary conditions will remain looser than in 2009-2010 (base money: 5%), the period immediately following the global financial crisis. Should the central bank prefer to manage the slowdown in base money at a more gradual pace (10% in 2012), however, we estimate that adding asset purchase by JPY 10trn in the remainder of this year will be needed.