Bank of Japan forecast to ease policy

The external uncertainties and yen’s strength will likely prompt the BOJ to ease again in the next three months, says DBS.

DBS Group Research noted:

The trade data out yesterday showed that trade deficit narrowed to JPY 0.3trn (seasonally adjusted) in June from JPY 0.6trn in May. The improvement in trade balance was largely attributed to the decrease in energy trade deficit, thanks to falling oil prices.

Imports of mineral fuels including petroleum and LNG, which account for 30% of total imports, fell sharply by -8.6% MoM sa. This level of decrease in energy trade deficit is unlikely to be repeated in July, as oil prices rebounded recently due to geopolitical tensions in the Middle East. We expect the trade balance to remain in deficits in the rest of this year, at about JPY 0.3-0.4trn (sa) per month.

The trade data also revealed that exports remained sluggish in June (-1.4% MoM sa). Machinery investment, which is sensitive to the trade cycle, has also deteriorated, as signaled by weaker imports of machinery, electrical machinery and transport equipments. The uncertainties on the outlook of external demand remain significant.

Meanwhile, the yen is now heading towards the 78.0 level again on the back of falling euro and rising demand on safe currencies, posing higher risks to Japan’s trade competitiveness. The finance minister this week has once again stepped up rhetoric to act against the one-sided yen appreciation. To counter the yen’s strength and the downside risks to growth, there is a good chance that the Bank of Japan will ease policy in the Aug-Oct period after leaving the overall stimulus package unchanged in July.