BoJ: Possible scenarios for September MPM – Deutsche Bank

Kentaro Koyama, Economist at Deutsche Bank, suggests that the BoJ’s declaration in its statement from the 29 July Monetary Policy Meeting (MPM) that it would conduct a comprehensive assessment of its policy at the next MPM in September has further clouded the monetary policy outlook.

Key Quotes

“The BoJ’s explanation thus far has been quite limited, but we offer in this report our forecast for the bank’s assessment and a comprehensive consideration of the conceivable scenarios for the assessment results.

Why now?

The BoJ has not provided a clear answer to this question, but we suspect it felt a need to confirm the effectiveness in particular of its negative interest rate policy (NIRP). The BoJ announced its NIRP in January and it came into force in February. BoJ Governor Haruhiko Kuroda said subsequently that it would take 6-12 months for the effects of NIRP to reach the real economy. In other words, by September, it will no longer be able to give the excuse that it is still waiting for the impact of NIRP. The bank might believe that it needs to face the effects fully.

Why conduct an “assessment” at an MPM?

We consider this to be a critical point. If the bank were intending to maintain its current stance – i.e., its present measures including NIRP have had an impact and it is prepared to ease again if necessary in the three dimensions of quantity, quality and interest rates – it could simply issue a report via its Monetary Affairs Department, as it did in the BoJ Review Series of 1 May 2015. At least two of the policy board’s members are likely to vote against current policy at the MPM, so the reasons for their opposition to the assessment results would be revealed in the Summary of Opinions and meeting minutes.

In addition, the release of such a statement can be expected to raise the volatility of financial markets. We can only assume the bank had good reason for deciding to conduct its assessment at the MPM in spite of such concerns. If it were taking additional action with the intention of easing further, we believe it would have been preferable to say something like, “We will review a wide range of policy options at the next MPM and reconsider monetary policy stance if deemed necessary. The chairman instructed the staff to prepare for such a scenario.” We believe the assessment is not a broad signal of another easing as at the ECB, but rather proof that it is genuinely assessing the effectiveness of its monetary policy. Moreover, the views of policy board members might not be as unified as expected.

What are the possible repercussions of the assessment?

The BoJ has said that it will carry out its assessment from the standpoint of what will be necessary to achieve its 2% price stability target at the earliest date. At face value, that would imply another easing ahead. However, its pledge to achieve the 2% target quickly is part of its January 2013 joint statement with the government (see Note) and cannot be altered unilaterally by the BoJ. In other words, the bank cannot claim that its assessment will include a revision of the 2% price stability target. Consequently, we should avoid taking it at face value.

One possible, if unlikely, conclusion from the assessment would be that an early realization of the 2% target is not feasible due to the hindrance in the transmission mechanism of monetary policy. In such a case, the bank would have to talk with the government and either amend the joint statement or call for a bolder fiscal policy. That leaves a wide range of conceivable scenarios other than easing in the current three dimensional policy or simply reaffirming present policy.”