Further monetary easing looms in Japan

Meanwhile political pressures facing the central bank are on the rise.

DBS Group Research noted:

The Bank of Japan met yesterday and today to review monetary policy. It is too soon for the BOJ to ease again after expanding asset purchases by JPY 10trn just two weeks ago on September 19th. That said, further monetary easing in the rest of the fourth quarter remains likely.

The 3Q GDP (due to be released in November) would be far weaker than expected, adding pressures on the BOJ to loosen policy. Industrial production fell for two consecutive months in July-August. Although PMI improved marginally by 0.3ppt to 48.0 in September, it remained below the neutral level of 50. The METI forecasts a further and deeper decline in industrial production in September (-2.9%).

By any measure, industrial production should have remained in contraction mode in September. Even assuming a steady growth in services output and a continued strong growth in construction output, the all-industry output is likely to fall 2-3% QoQ saar in 3Q. This is pointing to the possibility of a GDP contraction in 3Q.

Moreover, there is little evidence that the export outlook will improve soon in 4Q, if taking into account the weakness in global demand, the strength in the yen, and the repercussions of China-Japan political tensions. Domestic consumption is also losing steam, and a larger pullback in consumption growth is expected ahead in 4Q, due to the expiration of government stimulus on car sales.

In addition, the political pressures facing the central bank are also on the rise. Fiscal policy is crippled, as the public debt burdens are high, and the efficiency of policy implementation is low due to a divided parliament. The new Finance Minister this week ruled out the possibility of immediately preparing a supplementary budget to spur the economy. It was reported that the new Economics Minister, who has called for the central bank to take bold action to stimulate the economy, will attend today’s BOJ meeting.