The Bank of Japan began a two-day policy meeting Wednesday, with market participants expecting the central bank to cut its inflation forecasts, a move that would raise pressure for it to take additional steps to stimulate the economy.
The BOJ will study the possibility of further monetary easing. But some within the central bank believe it can hold its fire amid signs of moderate growth in the nation despite a consumption tax hike earlier this month and a slowdown in the world economy amid the fallout from the prolonged U.S.-China trade conflict.
The BOJ Policy Board will make a decision around noon Thursday, hours after the U.S. Federal Reserve announces its own on Wednesday. U.S. central bankers have so far kept the door open for a third interest rate cut this year.
A Fed rate cut could trigger a spike in the yen against the dollar, an undesirable development for the BOJ that could force it to follow suit in order to offset the potential impact on the currency market, where interest rate gaps between the U.S. and Japanese economies are one of the main focuses for traders.
The BOJ faced a similar situation in September but left its policy unchanged despite a rate cut by the Fed, pushing the yen slightly higher against the dollar. A stronger yen erodes overseas profits for Japanese firms when repatriated.
BOJ Gov. Haruhiko Kuroda has reiterated since the September meeting that he will not hesitate to employ further stimulus measures if momentum toward the central bank’s 2 percent inflation goal is lost. The BOJ will re-examine economic and price developments at this week’s meeting. The BOJ is widely expected to lower its inflation forecast for fiscal 2019 ending March from 1.0 percent projected in July. It has failed for years to hit the 2 percent goal despite aggressive monetary easing, including negative interest rates.
The country’s core consumer price index grew just 0.3 percent in September, the weakest rise since April 2017, fueling the view that the BOJ is running short of policy tools to achieve its inflation goal.
“Companies aren’t translating the tax hike impact onto consumers as much as expected,” said Mari Iwashita, chief market economist at Daiwa Securities.
“The BOJ is likely to trim its inflation forecast at its quarterly report for October,” she said, adding that the nationwide core CPI is likely to hit 0.5 percent in October.
Japan’s government proceeded with a twice-delayed increase in the sales tax rate to 10 percent from 8 percent in October as part of efforts to rein in the country’s huge public debt.
Kuroda has denied such speculation, saying in recent interviews that cutting interest rates further into negative territory is among the policy options at the central bank’s disposal. The BOJ currently keeps short-term interest rates at minus 0.1 percent while guiding long-term rates around zero percent.
The negative rate policy, however, has already been criticized for squeezing the profitability of commercial banks. Many economists believe the BOJ would have to introduce some measures to alleviate the pressure on their lending margins.
“We expect the BOJ to cut short-term interest rates and express its strengthened commitment (to keep rates at ultralow levels),” analysts at Mitsubishi UFJ Morgan Stanley Securities Co. said in a recent report.