Pressure Mounts on Japan's Abe, Central Bank as Data Fail to Dazzle
The prospect of imminent Bank of Japan and central government growth boosters increased on Friday after data showed that the country's deflation had steepened and business sentiment had weakened in some parts of the economy.
Japan's core consumer price index dropped by 0.4% year-on-year in May, according to a data announced by the Ministry of Internal Affairs and Communications. Core prices dropped in 0.3% in both March and April. They have fallen in six out of the last 12 months, remained flat for three, and risen only three months.
"Core CPI will likely continue to drop going forward given the strong yen and sluggish energy price," noted Mizuho Research economist Yayoi Sakanaka.
Bank of Japan Governor Haruhiko Kuroda has so far failed to hit his inflation target of 2%, which he initially set for 2015. However, with the economy struggling to accelerate, the central bank has delayed the timing and now aims for the goal to be achieved in the 2017 fiscal year. In the most recent monetary policy meeting held last month, the central bank kept its key interest rate at minus 0.1%. Kuroda said at the time that the central bank would maintain the negative interest rate and its quantitative easing policy "as long as it is necessary for maintaining that target in a stable manner."
The Bank of Japan is scheduled to hold its next monetary policy meeting on July 28 and 29.
The central bank's quarterly Tankan indices of business sentiment on Friday showed that the business sentiment of large manufacturers had remained unchanged, with the business conditions diffusion index flat from the March survey at 6. However, sentiment among large businesses other than manufacturers declined to 19 from 22.
The survey was taken before last Friday's Brexit referendum outcome in the U.K. While the yen had already been rising, since the Brexit vote it has strengthened from the ¥106-range to the ¥102-range against the dollar, and from the ¥120-range to the ¥113-range against the euro. The yen rose again today after the key indices were announced.
The Nikkei 225 has dropped 3.4% since the Brexit vote. Today, it edged up 0.68% to close at 15,682.48. Meanwhile, the yield on the 10-year Japanese government bond, which has attracted risk-averse investors, is currently at minus 0.27%.
"With the upper house election scheduled on 10 July, we expect stock prices to be supported by heightening expectations for major fiscal spending and additional monetary easing by the BOJ," said Mizuho Research's Sakanaka said. "That said, stocks will likely be top-heavy due to the ongoing yen appreciation."
Yesterday, data showed that industrial output in May dipped for the first time in three months, by 2.3%.
The government is considering a second supplementary budget this year to pour funds into public projects and boost consumer spending. Excluding the impact of the planned supplementary budget, the IMF expects the Japanese economy to expand by about 0.5% in 2016 before slowing to 0.3% in 2017.
UBS analysts noted today that they expect a rate cut in September following a ¥10 trillion stimulus package.
"We currently expect this in late-August, but the possibility of action as soon as around the 10 July Upper House election has now surfaced in light of recent political activity," they noted.
The Japanese government, led by Prime Minister Shinzo Abe, has continued to adopt measures to stimulate the economy with his so-called Abenomics "three arrow" policies. The first phase, which ran through 2015, involved monetary easing, injecting money into public projects, and investing in the private sector. In 2015, Abe adopted a new three arrow policy, which calls for nominal GDP of ¥600 trillion by 2020, boosting the birth rate, and strengthening social security to care for the elderly.