The Likelihood of BoJ Easing Next Week

The Fed’s Thursday easing announcement paves the way for the BoJ to announce its own asset purchase program expansion at next week’s policy meeting, in line with our previous view. There are certainly risks to this call: Just today the government released machine orders data showing a far more resilient July than expected, and earlier this week, China showed nascent signs of bottoming out, all of which may favor a pause for now. But comments by Ryuzo Miyao, one of the nine BoJ board members, on September 5 suggest the central bank’s outlook is already on a more dovish track, and this before the government revised down Q2 GDP to just 0.7% q/q SAAR, from 1.4% in the first estimate, on September 10.

Miyao pointed out that the Economic and Social Research Institute’s (ESRI) coincident and leading indexes have both been heading sharply south since peaking in March, which largely coincides with the country’s GDP performance. This leads us to believe that the BoJ is also paying attention to ESRI’s synthetic consumption index, which registered a sharp decline in July as well. Other survey data, including the Teikoku Databank (TDB) Economic Trends index and the Economy Watchers survey, corroborated deteriorating conditions in July and August.

Add to this the likely impact of both Fed and ECB easing over the past two weeks on the yen’s value and the CPI’s return to deflation, and it seems that now is as good a time as any to pull the trigger. The bigger question for us is whether longer-dated JGBs will be part of the expansion. Earlier this year the board extended the remaining maturity limit on bonds purchased from 2 to 3 years. We think there is a better than 50% chance that this will be extended again, perhaps to as much as 5 years, given that the average maturity of all outstanding JGBs is between 7 and 8 years.