Weak Economic Data Unlikely Triggers BOJ To Intensify Stimulus

Japan’s economic data released over the past 2 weeks underscored the downside risks to the economic and inflation outlook of the world’s third largest economy. It has also raised the uncertainty of the BOJ’s monetary policy going forward. The BOJ introduced ‘Quantitative and Qualitative Monetary Easing’ (QQE) in April 2013 to achieve the inflation target of 2%, with a time horizon of about two years. The program would be an open-ended one beyond 2014. We expect to see more guidance from the central bank in the October meeting regarding future stimulus measures in light of the current economic backdrop.

Trade deficits widened to 1080B yen in June from 861.3B yen a month ago as growth in imports surpassed that in exports. Exports rose +1.9% m/m, seasonally adjusted, in terms of values while import grew +5% m/m. From a year ago, exports contracted -2% while imports jumped +8.4%. Japan’s shipments to Asia account for over 50%the country’s Japan’s overall exports but trade with this region remained sluggish. Besides weakness in exports, domestic developments have also stayed subdued. Industrial production fell a seasonally-adjusted -3.3% m/min June. Looking into details, shipments dropped for the 5th straight week, by -1.9%. Inventory rose +1.9% while the inventory-shipment ratio gained + 3.5% during the month. The weakness in production exemplified the payback of the front-loaded demand before the VAT hike as well as sluggish exports.

Concerning the job market, the unemployment rate surprisingly rose to 3.7%, the highest level since January, in June with zero net jobs created over the month. Meanwhile, household expenditure slipped -0.4% y/y in June, following a -4.8% contraction in May. However, spending increased for the first time in monthly terms since the VAT hike in April. On inflation, nationwide CPI eased to +3.6% y/y in June from +3.75 a month ago. Core CPI (excluding fresh food) slowed to +3.3% from +3.4% while core-core CPI (excluding food and energy) accelerated to +2.3% from +2.2%. Removing the impact of the VAT hike in April, overall CPI was around +1.5% y/y while core and core-core were at +1.3% and +0.6% respectively. The down trend of core CPI since April’s peak indicated that the effect of the yen weakness continues to fade and this trend is expected to continue in coming months.

The recent economic developments have raised discussions about the BOJ’s policy stance. In April 2013, the BOJ introduced the QQE, under which the central bank aims to achieve the“2% in 2 years” CPI price stability goal though doubling the monetary base and the amounts outstanding of JGBs and ETFs in 2 years, and more than doubling the average remaining maturity of JGB purchases. The central bank’s goal is to increase the monetary base by 60-70 trillion per year. As of June, Japan’s monetary base increased to a record 233.25 trillion yen, up +42.6% from the same period last year. However, the measures would be open ended beyond 2014. Indeed, policymakers have already noted that inflation would slump through 1H13 (April-September) while remaining confident that core CPI inflation would reach its inflation target. Therefore, the recent soft inflation might have been anticipated by the central bank which might not necessarily think there’s a need to intensify stimulus. While we expect the central bank to provide forward guidance regarding the outlook of its stimulus plan in the October meeting, we expect it to keep unchanged the target monetary base at least until end June 2015.

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