Central Banks

Shinzo Abe's fiscal stimulus talk puts onus on Bank of Japan to ease

Bank of Japan under pressure after Abe's stimulus plan

Prime Minister Shinzo Abe's promise of a hefty fiscal stimulus package has effectively forced the Bank of Japan (BOJ) to come up with matching monetary ammunition at the close of its two-day meeting on Friday.

A report by news agency Jiji that Abe had revealed a 28 trillion yen ($265 billion) injection, which Reuters estimates at 6 percent of Japan's economy, surprised markets as many anticipated Tokyo would announce a fiscal package only sometime next week. The earlier-than-expected news now put the onus on BOJ Governor Haruhiko Kuroda to ensure coordinated fiscal-monetary expansion, according to the bulk of strategists.

"The timing of the stimulus package will be a consideration for Kuroda and suggests increased pressure to act," noted Robert Rennie, global head of market strategy at Westpac Bank.

On Tuesday, Finance Minister Taro Aso said he hoped the central bank would "do its utmost" to push inflation up to Tokyo's 2 percent goal—comments that were interpreted as a push for more easing.

Another factor that could sway the BOJ's hand on Friday is the depth of the fiscal package itself.

It's not yet clear how much of the fresh stimulus will be allocated to the full-year 2016 supplementary budget so fiscal support alone wouldn't re-inflate the economy, Chris Weston, IG's chief market strategist, said on Thursday.

"The fiscal measures can take time to work through the system and will do little to boost immediate inflation expectations and in theory if the Abe government are going big, then so should the BOJ," Weston said.

Those sentiments were echoed by Laura Fitzsimmons, vice president of rates and FX sales at JPMorgan.

"We're also concerned about what that package really is, what are the details. Even though the headlines look promising, we have to look at how long that spending will take...Everyone in the market should be cautious about it." Specifics of the fiscal package are due to be revealed next week, Jiji reported.

Despite the overwhelming consensus, there's still a chance Kuroda may choose to keep policy steady on Friday.

"There may be an argument that the BOJ may not want to do as much now that the government's taking more control...I wonder if the BOJ may want to hide behind the government's announcement," Fitzsimmons noted.

Tools available

Political pressure aside, commentators in the easing camp have pointed to a strong currency and softening inflation pressures as justification for BOJ action.

The yen is nearly 12 percent higher against the greenback year-to-date, making it one of the world's best-performing currencies and severely hurting the overseas earnings of Japan's export-centric companies.

Meanwhile, core inflation—the BOJ's preferred gauge, which excludes energy and fresh food—rose just 0.8 percent on-year in May, still well off the government's target of 2 percent inflation.

"I expect to see the BOJ announce a shotgun approach. That would include a widening of the range of assets the BOJ buys to include Zaito and FILP bonds [types of Japanese government debt], a possible doubling of equity-traded funds (ETF) purchases and an increase in loans with the possibility of negative loan rates," said Westpac's Rennie.

However, experts have cautioned against expecting significant impact from these asset purchases.

"The BOJ can't expand Japanese government bond buys (JGBs) too aggressively as they already own a third of JGBs and by the second quarter next year, they may run out of JGBs to buy. They may double their ETF purchases, but that won't be a game changer," HSBC explained in a Wednesday report.

HSBC also expects Kuroda to nudge interest rates deeper into negative territory by 10 basis points. Despite the policy's unpopularity with banks, the BOJ believes negative rates could force lenders to be more risk-taking, HSBC explained.

The idea of helicopter money, i.e. a direct capital infusion from the BOJ to narrow the budget deficit, was briefly speculated upon following former Fed chairman Ben Bernanke's visit to Japan, but Kuroda dismissed the notion last week.

The governor reiterated that if the bank were to ease, it would be focused on three channels: quantitative, qualitative and negative interest rates.

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