The Bank of Japan Resists the Fed's Trade War and Cloudy Outlook

The Bank of Japan is expected to maintain its mbadive stimulus package on June 20 and be ready to step up monetary support if rising risks, such as the growing trade war between the United States and China, threaten the modest expansion. of the economy.

Many BoJ policymakers are reluctant to use their ammunition, which is declining rapidly, as years of extremely low interest rates weigh on the profits of financial institutions, informed sources told the central bank.

But the gloomy prospect also forces them to prepare for a new economic downturn and think about ideas on how to react, they say.

Uncertainty is growing along with market expectations, and the US Federal Reserve will begin to reduce interest rates to avoid the damage caused by the trade war with China.

Although rate-cutting expectations have kept the floor on stock prices up to now, a real cut by the Fed could bring down the dollar and trigger an outbreak of the undesirable yen that would affect the US dollar. Japan's economy based on exports, according to some badysts.

"There might not be an immediate need for action," said one of the sources. "But with such great uncertainty about the prospects, the BOJ will have to think about how to react if a shock hits the economy."

When revising two-day rates ending June 20, the BoJ should largely maintain its short-term rate target at -0.1% and commit to guiding the 10-year government bond yield around zero percent. The Fed meets Tuesday and Wednesday.

The BOJ 's board of directors will likely maintain its views on the trend, but debate over the possibility of a resumption of growth abroad later this year remains depressed. news, according to sources.

At a press conference held after the meeting, BOJ Governor Haruhiko Kuroda confirmed that the central bank was ready to implement additional stimulus measures if the economy slowed down to reach its inflation target of 2%.

The Japanese economy grew 2.1% annualized in January-March, but many badysts expect a slowdown in growth in the coming quarters, as trade between the United States and China weighs World trade. A planned increase in the national sales tax in October could also ease consumption, they warn.

Many BoJ members prefer to wait for more data, such as the quarterly "tankan" poll of the central bank, scheduled for July 1, to see how trade tensions could hurt domestic demand, the sources said.

"Domestic demand, including capital spending, remains firm, and the key is to see if this remains the case," said a second source.

The Japanese consumer base annual inflation reached 0.9% in April, far from the goal of the BOJ, despite years of large sums of money printed by the central bank.

Many badysts believe that the BOJ has very few tools to fight the next recession, as its negative interest rate policy has the effect of hurting the margins of financial institutions and its long-term returns are already below zero. .Subscribe to Moneycontrol Pro and benefit from access to market data, exclusive business recommendations, independent stock badysis, actionable investment ideas, macro-level decision-making, business and politics, practical information from market gurus etc.