Could the BoJ pull the trigger next week?

Summary:

• Japanese inflation slows down more than expected, core prices remain intact though
• BoJ officials are divided when it comes to easing monetary policy next week
• Stock markets give back their earlier gains, Amazon and Alphabet earnings

Rising pressure

Japanese headline inflation slowed down more than expected in July, falling to 0.9% in annual terms from 1.1% seen in the prior month. The market consensus had called for a tiny decrease to 1%. At the same time, both core price indicators - excluding fresh food and fresh food plus energy - stayed intact at 0.9% and 0.8% respectively. It needs to be added that market expectations had suggested possible decreases in both gauges. Stubbornly low inflation in the Japanese economy is nothing new of course, however, with rising pressure from other central banks to make monetary policy more expansionary, the Bank of Japan might be pushed to the wall sooner or later if it wants to avoid undue yen appreciation. 

Major risk on the horizon

Among the top three central banks the two - the Federal Reserve and the European Central Bank - have already pledged to loose monetary conditions with the former expected to do so as soon as next week. In this environment there will be mounting pressure on the BoJ to follow. In fact, the BoJ has still reasons to ease monetary policy as price growth remains muted while we have another serious downside risk to the economic outlook - a sales tax hike scheduled for October. An increase in sales tax to 10% from 8% may have a substantial effect on private consumption and the Japanese authorities seem to know it (the economy saw the sharp decline in consumption in 2014 when the tax was hiked to 8% from 5%). As such, the government has rolled out some mitigating measures earlier this year aimed at offsetting the expected adverse impact. 

Limited firepower

Will them prove enough? It will turn out in the last quarter of the year, but having in mind what happened 5 years ago, the Bank of Japan may be on alert to act if necessary. Meanwhile, we were offered some news overnight that BoJ officials are divided on whether to act as soon as next week. Some of them see little to be gained from strengthening the bank’s interest rate pledge. What’s more, such an approach would even underline the bank’s limited firepower at a time when other major central banks are widely expected to ease policy. That said, one may expect that the BoJ could tweak its forward guidance once again, after doing so just three months ago by pledging to keep rates extremely low “at least through around spring 2020”.

The exchange rate could be an important factor to consider for the Bank of Japan when it meets next week (one day before the Fed). Source: xStation5

Stocks lower

The US stock market finished Thursday’s trading lower, with the NASDAQ falling as much as 1%. Other indices also went down - SP500 fell 0.5% and Dow Jones decreased almost 0.5%. These gloomy results came after heavy declines in Europe, with DAX plunging 1.3% as investors were disillusioned with the ECB. We also got some earnings from the US - Amazon showed EPS of $5.22 (exp. $5.56) and revenue of $63.4 billion (exp. $62.46 billion) while Alphabet showed off EPS of $14.21 (exp. $11.49) and revenue of $31.7 billion (exp. $30.84 billion). In Asia, major indices area trading down with the Japanese NIKKEI and the Hang Seng leading the losses and falling by more than 0.5%. 

In the other news:

• The House passed the debt-limit raising bill, now it’s Senate turn to vote