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Slim majority expect BOJ easing next week, with ETFs a favorite

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With inflation hovering near zero, growth well below the government's target and gains in the yen threatening to drive prices even lower, the Bank of Japan will expand stimulus at its policy meeting next week, according to 23 of 41 analysts surveyed by Bloomberg.

[TOKYO] With inflation hovering near zero, growth well below the government's target and gains in the yen threatening to drive prices even lower, the Bank of Japan will expand stimulus at its policy meeting next week, according to 23 of 41 analysts surveyed by Bloomberg.

Nineteen of the analysts predict the central bank will increase purchases of exchange-traded funds, eight expect a boost in bond buying and eight project the BOJ will cut its negative rate, the survey conducted April 15-21 shows.

The responses showed strong expectations that the central bank may need to bolster monetary policy soon, with more than 90 per cent of respondents forecasting more easing by the end of July.

Any further action on the negative rate may draw criticism, as the strategy has confused the public and drawn the ire of financial institutions and bond traders. More broadly, any increase in stimulus that weakens the yen could spark a backlash from trading partners including the US and Europe.

"I see a pretty good chance of further easing next week,'' said Hideo Kumano, an economist at Dai-ichi Life Research Institute and a former BOJ official. "There is no momentum in inflation and the yen's recent advance puts that at greater risk.'' Worries about the potential impact on inflation from a strengthening exchange rate are escalating at the BOJ ahead of the meeting next week, according to people familiar with discussions at the central bank.

The concerns underscore the importance of the yen in the BOJ's broader reflation campaign, despite Japan's pledge as a member of the Group of 20 to avoid any competitive currency devaluations.

A correction in a super-strong yen was among the key achievements of Governor Haruhiko Kuroda and Prime Minister Shinzo Abe, and helped stoke record corporate profits and a surge in stocks.

Officials are worried that a stronger currency, by weighing down corporate profits, may in turn reduce growth in investment and wages, weakening the "virtuous cycle" the BOJ is trying to foster.

While Mr Kuroda said this week that the central bank is ready to add stimulus if needed and that it could buy more assets, cut the rate or change the composition of purchases, some have raised doubts about how much more the BOJ can do.

The BOJ has little room to cut its negative rate, according to Sayuri Shirai, a BOJ member who voted against the rate's introduction in January and left the board at the end of March. Former deputy governor Kazumasa Iwata said the BOJ may reach the limits of bond purchases by the middle of 2017.

If the central bank decides to add more stimulus, some officials believe all "three dimensions" are possible, meaning they could change the quantity and quality of assets purchased, as well as adjust the negative interest rate, said the people.

Despite criticism of the negative rate by investors, officials remain confident of its effectiveness, said the people familiar with the discussions.

With a week to go until the policy board makes its decision, some officials believe a decision on more stimulus will be a close call, while others think the BOJ can wait longer to gauge the effect of negative rates.

In addition to carefully watching markets over the next week, the board will also scrutinize data on inflation, employment, industrial production and retail sales that will be released as they meet.

The yen's rise tops the list of developments since the BOJ kept policy unchanged at its March 14-15, Takeshi Yamaguchi, an economist at Morgan Stanley MUFG Securities, wrote in an April 20 note. He also highlighted the recent earthquakes in southern Japan, diminishing inflation expectations and "lackluster" annual wage talks.

Taken together, the changes will probably spur the bank to lower its projections for growth and inflation at next week's gathering, Mr Yamaguchi wrote. Any policy inaction would risk yet further yen appreciation, he said.

"We think the BOJ recognizes such a risk, likely announcing additional easing at the April" meeting, Mr Yamaguchi wrote.

BLOOMBERG