Barclays on the BOJ's dilemma

Author: Eamonn Sheridan | Category: Central Banks

The Bank of Japan's dilemma, say Barclays in their note, is Japan's growth- inflation gap

In brief, the points Barclays make (bolding mine):

Real GDP grew 4.0% q/q saar in Q2 & in Q1: 1.5%
  • sharply exceeding market expectations
  • Although some of this was attributable to public demand, private- sector domestic demand also continued to strengthen, led by private consumption
But ... inflation:

The GDP deflator ... fell 0.4% y/y (Q1: -0.8%), undershooting the previous year's level for a fourth consecutive quarter
  • This included a continuing slump in the domestic demand deflator
  • and the private consumption deflator, which is closely correlated with CPI inflation
The growth-inflation gap evident even in the GDP data presents a dilemma for the BoJ, which has stuck to a price stability target that appears difficult to reach

'Normalisation' of policy, or at least the initial step, is still a long way off say Barclays:
  • We forecast that the BoJ will take a first step toward normalizing monetary policy by slightly raising its target for long-term yields in Q3 18
And, on the inflation target, Barclays believes:
  • it will also have to introduce some flexibility around its inflation target
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I dunno about Barclays but I reckon the prospects of the BOJ revising its inflation target will come sooner rather than later, and not as far off as Q3 2018.
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Barclays goes on with a few more points:
  • government's approval rating  ... a recovery in support may depend heavily on parliamentary proceedings during the extraordinary Diet session to get underway from end- September
  • possibility that PM Abe will dissolve the lower house and call a general election while the opposition is on its back foot
  • possibility the new Cabinet will lean toward populist policy measures in a bid to restore support
  • For now, labor market reforms and other structural reforms entailing short-term pain could be put on the back burner
  • the prospect of the consumption tax being raised according to plan in October 2019 appears highly uncertain at this stage given the political schedule, which includes a lower house election (December 2018 unless dissolved early) and an upper house election (July 2019)