Bank of Japan Decision-Day Guide: Weak Economy Pressures Kuroda

  • Key inflation gauge has fallen to zero as oil slumps
  • Two economists expect a boost; October still favorite

Bank of Japan board members decide on Tuesday whether to increase record monetary stimulus as global market turbulence and China’s slowdown darken the the outlook for an economy that’s already struggling to pull out of a slump.

Thirty-three of 35 economists project the central bank will maintain the current pace of monetary stimulus, while two forecast an expansion. More than a third see the BOJ adding to current easing by the end of next month.

Inflation in July slowed to zero for the third time this year, while weakness in production and consumption sapped a rebound from a contraction in the second quarter, increasing pressure on Governor Haruhiko Kuroda. He said in August that the BOJ could meet its 2 percent price target with the current level of stimulus.

Mitsubishi UFJ Morgan Stanley Securities economist Naomi Muguruma, who correctly forecast Kuroda’s move in October 2014, warned of a possible “emergency” increase this week, while maintaining her prediction for policy change at the meeting on Oct. 30.

The BOJ typically announces its policy decision in the early afternoon, after which attention turns to Kuroda’s media conference at 3:30 p.m. in Tokyo. Any signs that the governor’s confidence in the economy is wanning will be in the spotlight.

The following are key points to watch:

Policy decision

This is the first policy meeting since July in which some economists see potential for policy action.

Hajime Takata, one of two economists forecasting more stimulus this month, points to turmoil in global markets, declining oil prices and the absence of a robust rebound at home. “It’s always been external shocks that have destroyed Japan’s recovery,” said Takata, from Mizuho Research Institute in Tokyo.

He expects the BOJ to accelerate the purchase of government bonds to increase the monetary base at an annual pace of 90 trillion yen ($749 billion), from the current 80 trillion yen.

Yuji Shimanaka, from a different part of Mitsubishi UFJ Morgan Stanley Securities to Muguruma, expects greater purchases of exchange-traded funds, and a smaller change in bond buying. The bank’s current pledge is to to buy about 3 trillion yen of ETFs this year, and it had already spent about 79 percent of that as of Sept. 10.

Still, Oct. 30 remains the most popular choice among economists for any increase in stimulus, with 11 projecting an expansion then.

That’s the meeting when the BOJ updates its forecasts for inflation and the economy. Some BOJ officials see a growing likelihood of lowering these estimates at that time and again delaying the time frame for reaching the price target.

BOJ’s risk assessment

Turbulence in stock prices in China -- Japan’s biggest trading partner -- is adding to external uncertainties. The domestic picture is also a challenge, with households reluctant to step up spending and investment by companies weak.

Economists have trimmed their forecasts for growth in 2015 as disappointment with Abenomics spreads.

For months, BOJ officials had said a downturn in the economy in the second quarter was a temporary soft patch. Now, that could come into question. People familiar with the discussions at the BOJ have noted weakness in industrial output and exports, and renewed declines in oil dragging on inflation expectations.

Production, orders for machinery, and household spending all unexpectedly declined in July, after the economy contracted an annualized 1.2 percent in the April-June period, according to government data.

Currency markets

Any remarks about the yen, which surged the most in five years to touch 116.18 per dollar on Aug. 24, will be scrutinized.

The currency slumped as Abe came to power and Kuroda launched his monetary program, in the process helping many exporters and profits at large companies. That caused a backlash in some quarters, as importers and small companies were hit by rising costs.

The yen’s recent strength could make some room for the BOJ to bolster stimulus, according to Masaaki Kanno, chief economist at JPMorgan Chase & Co.

Lawmaker’s view

While Kuroda steers well clear of politics, lawmakers have at times been vocal on their views about the bank.

Kozo Yamamoto, a lawmaker in the ruling Liberal Democratic Party and an adviser to Prime Minister Shinzo Abe, said last week that October would be a good opportunity for the bank to bolster stimulus.

Abe has said he understands the BOJ’s explanation that achieving the 2 percent price target has become difficult because of falling oil prices.

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