2016.09.1606:07:00UTC+00Bank of Japan Unlikely to Ease Policy, Likely to Adjust Policy Framework

The Bank of Japan is unlikely to ease policy during its upcoming meeting next week, said Danske Bank in a research report. But it is expected to adjust its policy framework by leaving calendar-based communications on when it anticipates reaching the 2 percent target and instead try and pursue 2 percent inflation at the earliest.

Looking at Japan’s economic data, the economy continues to perform much better than most anticipated. The second quarter GDP data was upwardly revised to 0.2 percent quarter-on-quarter from the initial estimate of zero percent. Meanwhile, the PMI manufacturing business survey rebounded in recent months, implying stabilization in the manufacturing sector. Furthermore, with the government’s fiscal stimulus package, which is likely to raise growth by around 0.2 percentage points this year and 1 percentage point in 2017, the Japanese economy is likely to keep expanding above trend in the coming year.

“We forecast GDP growth of 0.6 percent in 2016 and 1.1 percent y/y in 2017”, added Danske Bank.

Furthermore, USD/JPY has stabilized and the Brexit vote seems to have had just a slightly effect on global economy so far. Therefore, the BoJ might see only a small need for additional easing now. The Bank of Japan is likely to keep its negative interest rate policy and keep the door open for additional rate cuts in the future.

Moreover, the central bank is likely to adopt a more flexible approach with its quantitative target for annual rises in the balance of JGB purchases as it is expected to continue its asset purchases for a longer period than it expected initially. It also requires enhancing the sustainability of its asset purchases to aver premature tapering discussions, according to Danske Bank.