DBS expects Bank of Japan's looming monetary easing in Q4

Following the latest policy easing in August, the Bank of Japan refrained from further expanding the asset purchase program or lending program at the latest monetary policy meeting. In the statement, the BOJ appears satisfied with the progress of post-earthquake recovery thus far, but recognizing the downside risks to the future growth outlook stemming from the debt problems in US and Europe as well as the fluctuations in the FX market.

Indeed, economic growth is likely to slow from 4Q onwards after completing the post-quake supply chain recovery, and the weaker G2 outlook bodes ill for Japan’s exports – the key pillar to its incremental GDP. This morning’s reports showed that machinery orders, as a leading indicator, fell -8.2% MoM sa in July, worse than the consensus forecast of -4.2% and reversing the 7.7% rise
in the previous month.

With the growth recovery losing momentum and deflation pressures persisting, we don’t dismiss the chance that the BOJ will further loosen policy in the Oct-Dec period. Meanwhile, the BOJ may have to closely watch the FOMC meeting to counter the impact on the Japanese yen resulting from any easing actions by the US Fed.

Nevertheless, extraordinary monetary measures solely targeting at the yen exchange rate is unlikely. The vice finance minister commented yesterday that Japan respects the free floating exchange rate system, despite the SNB’s latest move of setting a limit on the EUR/CHF level.