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2 Aug 2013
Why BoJ likely to ease more?
FXstreet.com (Barcelona) - There are two developing stories at present, both building a strong case for the Bank of Japan to engage in more aggressive easing practices, likely before year-end, despite a better economic outlook and reportedly greater tax revenues collected in recent months as the country reduces the jobless rate.
First factor: The sales tax hike
The first reason lies on the 'big hint' provided by Finance Minister Taro Aso earlier this week, when he said, "I don't think we have an option not to hike the sales tax rate, unless there is an extraordinary shock from overseas similar to the Lehman shock."
Mitsuru Obe from the WSJ, in an articles published earlier today, notes: "Japan's budget planners are expected to say the country still needs a controversial sales-tax increase to restore the government's battered finances, according to a 3-year fiscal road map to be released expected Friday."
If the sales tax comes into effect, the market is likely to start discounting, at some point, possible downward pressure in price levels, as the tax poses risk for lower spending & sentiment, leading to no wage increases. On this front, Japan still shows weak levels of salary increases, with the last labour earning report indicating so.
As explained earlier on the week in an article titled "Evidence mounts Japan to hike sales tax" , "if the tax hike were to be implemented, chances are that inflation might be harder to achieve, thus the Bank of Japan having to potentially play an aggressive easing role for longer to hit the 2% sustainable inflation goal."
Second factor: China slowdown
The second compelling story, which may leave the BoJ with no choice but to increase the amount of bonds it purchases, emanates from the fact that China will loose further growth momentum. As a reminder, China is a major importer of Japanese goods, and if the demand were to deteriorate further, it is sensible to think the BoJ will need to inject further stimulus.
According to Sebastien Galy, Strategist at Societe Generale: "We like USD/JPY higher, not just for the usual Abenomics reasons, but also because the BOJ may have to ease more as China slows down further, given that it equals the US as Japan's top export market..."
First factor: The sales tax hike
The first reason lies on the 'big hint' provided by Finance Minister Taro Aso earlier this week, when he said, "I don't think we have an option not to hike the sales tax rate, unless there is an extraordinary shock from overseas similar to the Lehman shock."
Mitsuru Obe from the WSJ, in an articles published earlier today, notes: "Japan's budget planners are expected to say the country still needs a controversial sales-tax increase to restore the government's battered finances, according to a 3-year fiscal road map to be released expected Friday."
If the sales tax comes into effect, the market is likely to start discounting, at some point, possible downward pressure in price levels, as the tax poses risk for lower spending & sentiment, leading to no wage increases. On this front, Japan still shows weak levels of salary increases, with the last labour earning report indicating so.
As explained earlier on the week in an article titled "Evidence mounts Japan to hike sales tax" , "if the tax hike were to be implemented, chances are that inflation might be harder to achieve, thus the Bank of Japan having to potentially play an aggressive easing role for longer to hit the 2% sustainable inflation goal."
Second factor: China slowdown
The second compelling story, which may leave the BoJ with no choice but to increase the amount of bonds it purchases, emanates from the fact that China will loose further growth momentum. As a reminder, China is a major importer of Japanese goods, and if the demand were to deteriorate further, it is sensible to think the BoJ will need to inject further stimulus.
According to Sebastien Galy, Strategist at Societe Generale: "We like USD/JPY higher, not just for the usual Abenomics reasons, but also because the BOJ may have to ease more as China slows down further, given that it equals the US as Japan's top export market..."