Central Banks

This BOJ meeting will be a cliffhanger

A pedestrian holding an umbrella walks past an electronic board showing prices of Japan's Nikkei average in Tokyo.
Yuya Shino | Reuters

The Bank of Japan may confound the chorus of analysts calling for further easing at its policy meeting Friday after industrial production data Thursday came in better than expected.

With the central bank's inflation target of 2 percent by the middle of next year still looking tough to hit and much of Japan's other economic data painting a mixed picture, expectations have grown that the BOJ would step up its already massive quantitative easing (QE) program on Friday.

The program, currently calling for the central bank to increase its monetary base by 80 trillion yen ($662 billion) annually, was launched in 2013 as the first "arrow" of Abenomics, or Prime Minister Shinzo Abe's plan to push Japan's economy out of its decades-long deflationary slump.

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But data released Thursday showed factory output rose 1.0 percent in September from the previous month, topping a Reuters poll forecast for a 0.5 percent drop and reversing August's 1.2 percent fall.

"The rebound in industrial production in September and upbeat forecasts for the fourth quarter have reduced the chances that the Bank of Japan will announce more easing," Marcel Thieliant, a Japan economist at Capital Economics, said in an email Thursday. That's a turnaround from a research note he published Monday, saying an announcement of more stimulus was likely as the BOJ was also likely need to postpone its timeframe for hitting its inflation target for a third time.

"Postponing the timeframe yet again without providing more stimulus would cast doubt on the bank's willingness to reach its target, and would thus endanger the success of (the program," he had said Monday.

Thieliant isn't alone in seeing the data as a potential dampener for any BOJ QE party plans.

Harumi Taguchi, principal economist at IHS Economics also thinks the data will rain on the easing parade Friday. But she added there still could be further easing by the end of the first quarter of next year.

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"Inventory levels are still relatively high for a number of industry groupings," she said via email, adding that weak exports and destocking could spur a BOJ move.

Some are sticking to their expectations the BOJ will pull the trigger Friday.

Societe Generale said via email Thursday that it expects the BOJ will boost its asset purchases by 5 trillion yen annually, citing "the clear and present danger that the economy slipped back into recession, and increasing doubts that the 2 percent inflation target can be achieved within a reasonable timeframe."

In the second quarter, Japan's gross domestic product (GDP) shrank an annualized 1.2 percent. The core consumer price index (CPI), which excludes fresh food prices, fell 0.1 percent on-year in September.

The bank isn't alone. Michael Taylor, an economist at Oxford Economics, said via email that he's sticking with his research note Tuesday calling a 20 trillion yen boost to the QE program.

The industrial production data are "good news clearly, but the economy is weak and inflation well below target," he said via email.

"The trigger for policy change this month could be the BOJ's quarterly gross domestic product (GDP) and consumer price inflation (CPI) forecasts, both of which are likely to be downgraded," he said in the note Tuesday, noting that the current BOJ forecast for fiscal 2015 GDP is at 1.7 percent and 0.7 percent for CPI excluding fresh food.

Even if the BOJ doesn't ease Friday, Taylor expects the government may step up with stimulus via a supplementary budget.

To be sure, a lot of analysts give expectations for further easing short shrift.

"The improvement in the industrial production figures should bolster the BOJ's confidence that Japan's economic recovery remains on track. We expect the central bank to keep policy on hold," Izumi Devalier, an economist at HSBC, said in a note Thursday.

But even analysts who don't expect the BOJ will take the easing leap on Friday are hedging their views slightly.

"So far, policymakers appear happy with the modest and gradual rise in inflation and wage growth," DBS said in a note last week. But it noted that the BOJ surprised markets in 2013 and 2014.

"Policymakers would still like to spring surprises, either in terms of the actual size of QQE expansion or the timing of announcement," DBS said, adding that while it doesn't expect a surprise on Friday, it assigns an at least 50-50 chance it will happen in the next year.