Goldman On BOJ’s Banzainomics: “We Highlight The Potential For Harsh Criticism Of Further Cost-Push Inflation”

It was about several months ago when Goldman, which initially was an enthusiastic supporter of BOJ’s QE, turned sour on both Abenomics and the J-Curve (perhaps after relentless mocking on these pages), changed its tune, saying an unhappy ending for Abenomics is almost certainly in the cards.

Not surprisingly then, in its post-mortem of the BOJ’s overnight action, already being affectionately called Banzainomics, is hardly glowing, and is summarized as follows: “We maintain our view that unless the yen continues to depreciate significantly, as a result of the latest QQE action, the BOJ is unlikely to meet its scenario for inflation to stably reach 2% during FY2015. From a political perspective, with nationwide local elections looming in April 2015, we also highlight the potential for harsh criticism of further cost-push inflation driven by the weaker yen among nonmanufacturers, SMEs, and households. Irrespective of the latest easing moves, we believe the BOJ is treading a very narrow path.“

Full note from Goldman’s Naohiko Baba:

Further QQE and move to a fully open-ended easing program

The Bank of Japan announced further quantitative and qualitative easing (QQE) action at its Monetary Policy Meeting on October 31 (Exhibit 1). It also officially removed the 2-year timing target for achieving 2% price stability, making the timeframe completely open ended (by a vote of 5 to 4). While the latter announcement was within the scope of our expectations, the first came as a surprise (we had assumed further easing action would be announced in January 2015). The additional QQE measures are as follows:

1. Pace of monetary base increase will be stepped up by ¥10 tn-¥20 tn per year, to around ¥80 tn per year.

2. Long-term JGB purchases will be stepped up so that the outstanding JGB portfolio will increase by around ¥80 tn annually, an acceleration of around ¥30 tn. The average remaining maturity of the BOJ’s JGB purchases will be extended to 7-10 years (extension of a maximum 3 years). In addition, the outstanding ETF portfolio will be increased at an annual pace of ¥3 tn, tripled from the current pace of ¥1 tn, and annual REIT purchases will triple to ¥90 bn, from ¥30 bn. The JPX-Nikkei 400 index is newly added to eligible ETF purchases by the BOJ.

BOJ sharply lowers Outlook Report FY2014 growth forecast

In the biannual Outlook Report published today, the BOJ sharply lowered its FY2014 real GDP growth forecast to +0.5% yoy, from +1.0%, in line with our expectation. It only made minor revisions to its price outlook, however, adjusting its CPI forecast to +1.2%, from +1.3%, for FY2014 and to +1.7%, from +1.9%, for FY2015. It therefore maintained its scenario that inflation is likely to reach around 2% sometime in FY2015 (Exhibit 2). We believe the bank has factored the impact of the additional QQE mentioned above into its outlook.

Further easing to stop inflation expectations receding

However, in the risk assessment section of the Outlook Report, the BOJ noted that risks to its price outlook are to the downside. It explained that sustained weakness in post-tax-hike demand and downward price pressure from the decline in crude oil prices could pose a risk of delayed improvement in inflation expectations that could create downside risks to prices per se. It said it had taken additional QQE measures to prevent the risk of a delayed turnaround in deflationary mindset from materializing. Although denied by Governor Kuroda at the press conference, we think the bank may have sought to give its support to a second consumption tax hike (slated for October 2015, decision to be taken early December) at a time when increasing number of voters as well as politicians are expecting the timing of the next tax hike to be pushed back. Amid a slew of weak macro data following the April tax hike, we think the Japanese government has a strong desire to lift share prices as far as possible and thereby improve corporate and household sentiment to make it easier for Prime Minister Abe to commit to a second tax increase. In our view, it is no coincidence that GPIF portfolio changes (lowering of domestic bond allocation, increase in equity allocation) and the BOJ’s adding easing measures were announced the same day.

Attaining 2% price stability target still looks very challenging

Prices have trended broadly in line with our outlook over the past six months or so. The September national core CPI, announced today, slowed to +1.0% yoy and has now reached the bottom end of the previous assumption of the BOJ’s 1.0%-1.5% range. With the October Tokyo core CPI also slowing further, crude prices trending downward and the post-tax-hike economy weakening more than anticipated, we think the CPI could dip below +1.0% near term. We maintain our view that unless the yen continues to depreciate significantly, as a result of the latest QQE action, the BOJ is unlikely to meet its scenario for inflation to stably reach 2% during FY2015. From a political perspective, with nationwide local elections looming in April 2015, we also highlight the potential for harsh criticism of further cost-push inflation driven by the weaker yen among nonmanufacturers, SMEs, and households. Irrespective of the latest easing moves, we believe the BOJ is treading a very narrow path.

Exhibit 1: BOJ expands monetary easing
BOJ Quantitative and Qualitative Easing