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Bank of Japan has 'limited' options to spur growth if the trade war heats up further: Goldman Sachs

Key Points
  • The Bank of Japan has "pretty limited" options if the trade friction between China and the U.S. becomes worse, said the chief Japan strategist at Goldman Sachs, Kathy Matsui.
  • The short-term interest rate in Japan has been kept unchanged at -0.1% since the BOJ adopted negative interest rates in January 2016, as the country's central bank struggles to meet an elusive inflation target.
  • Matsui said Japan is likely to rely on fiscal policy rather than monetary policy in terms of its stimulus options going forward.
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Japan may have to lean on fiscal policy in future: Goldman Sachs

The Bank of Japan likely heaved a sigh of relief following Friday's strong economic numbers, but the central bank will have to remain "on guard and prepared to do more" amid the present global uncertainty, said the chief Japan strategist at Goldman Sachs, Kathy Matsui.

However, the BOJ has "pretty limited" options if the trade friction between China and the U.S. becomes worse, according to Matsui.

Japan reported Friday that gross domestic product grew at an annualized rate of 1.8% in the second quarter which ended in June, preliminary data from the Cabinet Office showed. It was much better than a median forecast for a 0.4% growth.

It comes at a time when short-term interest rates in Japan has been unchanged at -0.1% since the BOJ adopted negative interest rates in January 2016. The country's central bank has been struggling to meet an elusive inflation target of 2%.

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Bank of Japan surprises with negative rates

In late July, the bank said it "will not hesitate to take additional easing measures" if the economy loses momentum as it seeks to achieve the target inflation rate.

"If the yen were to appreciate much further, let's say (it) breaks the 100 barrier (against the dollar), I think that could force the BOJ's hand to do something more," Matsui told CNBC's "Squawk Box" on Friday.

That comes against a backdrop of central banks across the region — from India to New Zealand and Thailand — cutting interest rates this week amid concerns over the outlook for economic growth.

"They (Japan) obviously can take negative rates even further to negative territory but that is not without any cost," Matsui said.

That cost would be borne by the country's banking system, whose net interest margins are "already suffering" as a result of negative interest rates being set for a prolonged period of time, she added.

"In terms of what stimulus options the government has, rather than monetary (policy), I think it's gonna be very much leaning on fiscal (policy) going forward," Matsui said, indicating the government may have to turn to taxes and spending to spur the economy.