No surprises from the BoJ

Emily Nicol
Chris Scicluna

Overview:
With the spread of China’s coronavirus raising fears of a repeat of the region’s experience with SARS seventeen years ago, risk appetite was largely absent from East Asian financial markets today, with most of the main equity indices in retreat. Hong Kong, whose economy was most acutely affected by that previous viral episode, led the way, with the Hang Seng currently down 2.7%, not helped by a one-notch downgrade of the government’s credit rating by Moody’s. Elsewhere, China’s stocks were unsurprisingly most affected, with the CSI300 down 1.7%. But Japan’s TOPIX fell a more moderate 0.5% as the BoJ revised up its economic growth forecast across the horizon while also – as it seems to do every three months – nudged down its inflation projections for coming years while also leaving its main policy parameters unchanged.

US and European stock futures inevitably also fell in Asian time. And the week’s trading in USTs got underway with yields moving lower across the curve, with 10Y yields down about 3bps back to 1.79%. JGBs were also stronger, with 10Y yields down about 1bp to -0.01% and the curve a touch flatter as BoJ Governor Kuroda stated that the risks to the outlook were still skewed to the downside and that he would therefore maintain an easing bias. And the yen inevitably responded to the risk-off mode by strengthening back through ¥110/$. Elsewhere, ACGBs were a touch firmer even as the latest Aussie consumer confidence survey showed a second successive modest improvement having dropped at the start of the year to its lowest level in more than four years.

Looking ahead, today’s most notable economic news will be the UK’s latest labour market report, which will provide the next piece of evidence for the BoE to consider next week as it weighs the case for a rate cut.

Japan:
There were no surprises from the conclusion of the BoJ’s latest Policy Board meeting a few hours ago. In particular, the yield curve control framework was left unchanged, with the -0.1% policy rate and 0% 10Y JGB target unamended. The BoJ also maintained its commitment to increase its holdings of JGBs and ETFs at annual rates of ¥80trn and ¥6trn respectively, although Governor Kuroda reiterated in his press conference that this was a rough guideline – indeed, the full-year increase in JGBs in 2019 was just ¥25trn (having been on a steady downward trend since 2016), while the annual increase in ETFs was around ¥4½trn. But in line with the BoJ’s preference for a relatively steep yield curve, he also noted that it would not be ‘strange’ if super-long bond yields rose further, supporting our view that purchases of long-dated JGBs will likely continue to be steadily phased out and will eventually fall to zero this year. While mindful of the negative side effects, Kuroda claimed that the benefits of the BoJ’s policy continue to outweigh the costs, suggesting no imminent need to review the current policy framework. And while we think the hurdle for additional easing is high, Kuroda reiterated that the BoJ maintains an easing bias.

The BoJ’s Outlook Report arguably suggested no need to amend its current policy stance, with no meaningful revisions made to the Board’s assessment of the outlook. Admittedly, recent upward revisions to the estimates of GDP growth in 2019 saw the BoJ revise up its full-year growth projection for FY19 by 0.2ppt to 0.8%Y/Y, while the government’s fiscal stimulus package underpinned an improved growth projection for FY20 by 0.2ppt to 0.9%Y/Y, while growth in FY21 was upwardly revised by 0.1ppt to 1.1%Y/Y. But while the BoJ echoed the recent assertions of other policymakers, such as the IMF yesterday, that concerns about global demand had recently decreased somewhat, Kuroda emphasised that the associated risks still remained significant and firmly skewed to the downside. He also unsurprisingly flagged the recent weakness in domestic demand related to October’s consumption tax hike and natural disasters. But while the BoJ maintained its view that the economy is likely to continue on an expanding trend, it also nudged slightly lower its expectation for core inflation over the forecast horizon, by 0.1ppt per year to 0.6%Y/Y in FY19, 1.0%Y/Y in FY20 and 1.4%Y/Y in FY21. And these projections still seem overly optimistic in our view.

UK:
Ahead of next week’s BoE MPC meeting, today’s labour market report will be closely watched. But it is not expected to make a clear cut case either for or against a rate cut. In particular, while it’s expected to report a stable unemployment rate at 3.8% in the three months to November, it is also expected to show a rebound in job growth to above 100k3M/3M for the first time since June. In contrast, pay growth is expected to slow for a fifth consecutive month, to 3.4%Y/Y when excluding bonuses, which would be the softest since April.

Euro area:
A relatively quiet day for economic news from the euro area today will bring just the German ZEW sentiment survey of financial market professionals. While this survey often tracks moves in equity markets, it will nevertheless be one of the first to offer insight into sentiment at the start of the year. Assessments of the current situation are expected to have improved to a five-month high in January, while expectations for the near-term outlook are forecast to have risen to their most optimistic since early 2018.

US:
There are no top-tier US economic releases due today to distract from the start of President Trump’s impeachment trial.

Australia:
With the bushfires seemingly under better control, the latest ANZ-Roy Morgan weekly consumer confidence survey saw its headline index rise for a second successive week, up 1pt to a four-week high of 108.3. Of course, having fallen to the lowest since November 2015 just a fortnight ago, it remained very close to the bottom of the range of the past five years, and it’s hard to describe the survey findings as upbeat. Indeed, compared to the previous two surveys, a smaller net share of respondents (23ppts) expect to be better off this time next year. And, on balance, they expect Australian economic conditions as a whole to deteriorate over the coming twelve months and over a longer time horizon too. However, in today’s survey a larger net share of respondents (and the highest for three months) judged now to be a good time to buy major household items. The monthly Westpac consumer confidence survey for January will be released tonight and seems highly likely to show a deterioration in sentiment on the back of the bushfire crisis.

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