Research Blog
Japan: Set for a bleak midwinter?
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Emily Nicol, Economic Research
Daiwa Capital Markets Europe Limited
5 King William Street, London, EC4N 7AX
+44 (0)20 7597 8331
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22 December 2011
When its latest Policy Board meeting concluded yesterday, there were no prizes for guessing that the BoJ left its monetary policy, including the size of its asset purchase programme and fund-supplying facilities, unchanged. However, the meeting was not without note, with the BoJ's statement providing a bleaker assessment of current conditions than of late (see table at end), stating that the recent post-quake pick-up in Japan’s activity has paused and that output is expected to remain flat for the time being. The sharp appreciation of the yen – which was the main trigger for the most recent dose of monetary easing in October – as well as softer global demand have no doubt had a marked impact on the momentum of Japan’s recovery, a point reinforced by yesterday's disappointing trade report. Export volumes declined for the second successive month and by a sharper-than-expected 2.7% on the month, to leave them down 0.5% on a 3M/3M basis – the first such decline since June. And with import volumes up 1.4% on a 3M/3M basis, in the absence of a marked improvement in the trade balance in December, net trade looks set to have weighed on GDP growth in Q4.
Export and import volumes
Source: BoJ and Daiwa Capital Markets Europe Ltd.
Japanese manufacturers are also understandably more downbeat about near-term business conditions. The BoJ’s latest Tankan survey shows that they are now resigned to the strong yen persisting – with the exchange rate expectation for H2FY11 revised to ¥77.9/$, from ¥81.1/$ previously – and have accordingly downgraded their assessment of business conditions, with the Tankan’s headline manufacturing DI declining by a steeper-than-expected 6pts to -6 in Q4. With manufacturers reporting that excess supply conditions, both domestically and overseas, increased markedly at the end of the year, they expect conditions to deteriorate further over the coming three months. And while we always expected export-oriented manufacturers to find life tougher under the more challenging external environment, large non-manufacturers have also flagged concerns about excess domestic supply.
Indeed, the downside risks to the outlook are not confined to external demand. Despite the recent approval of the third supplementary budget, which assigned around ¥9trn to reconstruction spending, the Tankan suggests that firms expect reconstruction demand to remain weak at the start of the new calendar year and into the new fiscal year too. That would be broadly consistent with October’s machine orders data, which showed another marked decline on the month, with a weak showing in orders from the construction sector. So, while firms continued to indicate in the Tankan survey that they remained committed to increasing their capital spending through the second half of FY11, private sector investment growth over the near term could well disappoint. Furthermore, should implementation of the government’s reconstruction effort be delayed, both the BoJ’s (2.2%) and our (1.8%) GDP growth forecasts for next fiscal year would look too optimistic, given that the lion’s share of growth is supposed to be accounted for by public sector investment.
For now, at least, the BoJ still expects the economy, in due course, to return to a moderate recovery path supported by reconstruction-related demand and exports to EM countries. But it rightly acknowledges that the risks are firmly to the downside, not least due to the precarious situation in the euro area. While financial sector stress in Europe has intensified significantly over recent months, however, Japanese financial conditions remain accommodative. And having increased the size of its asset purchase programme three times already this year the BoJ has plenty of headroom under its current targets to purchase more assets to ease financial conditions if it felt it to be appropriate. So, for now at least, it might see little point in increasing those asset purchase targets much further. Nevertheless, at its next Policy Board meeting in January, the BoJ will agree new economic forecasts. And if it has to significantly mark down its assessment of the outlook for growth and inflation, and/or if the yen has by then appreciated much further (against the dollar, and not just the euro) and/or equity markets have taken another marked step down, we would not rule out another token increase in its asset purchase target and/or fund-supplying facilities, if only to give the impression of action.
New asset purchase programme
Source: BoJ
Changes in the BOJ's assessment of the economy
Source: BoJ; compiled by Daiwa Securities CM
Emily Nicol, Economist
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