BoJ, no hay camino, se hace camino al andar... (tiene la deflación en mente)
Titulares.
- The BoJ has sharply cut its growth/price forecasts and now the baseline scenario sees negative growth continuing through FY 2009 before it recovers modestly in 2010.
- But the BoJ admits that the probability of a 2010 recovery is not very good because it is premised on growth and inflation expectations remaining unchanged, a very shaky assumption given the strong likelihood of economic deterioration through 2009.
- If negative growth looks likely to continue into 2010, the risk of a deflationary spiral will mount, as consecutive years of business losses will compel companies to shed labour and slashprices, leading to deflationary expectations as well as sharply lower growth expectations.
- Policy will likely focus on expanding the range of assets that are bought, rather than a reversion to the old quantitative easing; and if the risk of a deflationary spiral increases, the BoJ will probably undertake large-scale
purchases of long-term JGBs to support the government’s expansionary fiscal policies.
"Previsionando" . Adjunto previsiones
Growth and price forecasts revised down sharply At the Monetary Policy Meeting that ended on 22 January, when an interim evaluation was made of the Outlook for Economic Activity and Prices released in October 2008, the BoJ sharply revised down its growth and price forecasts for FY 2008 through FY 2010. Now the BoJ expects growth will be negative in 2008 and 2009 before recovering modestly in 2010,with the new forecast figures (median of the majority of policy board members’ projections) being -1.8% for 2008 (down from 0.1% in October), -2.0% in 2009 (down from 0.6%) and 1.5% in 2010 (down from 1.7%).
Besides cutting its growth forecast so drastically, the BoJ also ominously acknowledges that the probability of realizing the 2010 recovery projected in its baseline scenario is not very good, with the MPM statement noting that “Although this scenario offers prospects for the economy to return to a sustainable growth path with price stability in the latter half of the projection period, uncertainty is high”.
"Deflacionariamente thinking"
Spectre of deflationary spiral
To make matters worse, the risk factors mentioned in the MPM statement deserve especially close attention because there is a hint that long-term price stability could be disrupted by a deflationary spiral.
Despite acknowledging negative growth through 2009, during which time the output gap will continue to deteriorate, the BoJ’s scenario for a return to expanding at the potential growth rate in 2010 is premised on a shaky assumption, namely “the assumption of medium- to long-term growth expectations and inflation expectations remaining generally unchanged”. But when addressing risks on the price front, the BoJ betrays concerns about succumbing to a deflationary spiral when it states that “there is a possibility that the inflation rate will decline further if downside risks to economic activity materialise or commodity prices fall. In this case, the risk of a decline in medium- to long-term inflation expectations of firms and households warrants attention”.
Deflationary risks will mount if growth is negative into 2010
Now what kind of situation could trigger a deflationary spiral? In short, if the recovery projected for 2010 does not materialise and negative growth continues for a third straight year. It is widely expected that severe economic contraction will begin from Q4 2008 and, under the BoJ’s scenario, the economy should start to escape from negative growth roughly a year later, namely in the latter half of FY 2009.
But what if negative growth does not end then? If economic shrinkage is limited to one year, most businesses would deem it to be just a one-off shock, so there would not necessarily be any significant change in long-term relations with employees or customers. But if economic contraction is prolonged and businesses suffer losses for a second straight year, survival will start to become a pressing concern for many companies. In such an event, employment adjustment would probably escalate to the point of massive layoffs of even regular employees, which could push the jobless rate (3.9% in November 2008) into double digits.
Securing cash flow would also likely become such a vital issue that companies would rush to sell their goods/services at fire sale prices, thereby altering long-term price setting behaviour. In other words, the long-term growth expectations of households and businesses would decline sharply and deflationary expectations would prevail. So, if negative growth looks likely to continue into 2010, the risk of Japan succumbing to another deflationary spiral will mount.
Sus ultimos "pasos" ;
Latest policy decision
Moving on to policy matters, the measures approved at the January MPM were in line with expectations.
Specifically, the BoJ:
a) left the policy rate unchanged at 0.10%;
b) announced guidelines for outright purchasingof up to JPY 3trn of a1-rated CP (an issue agreed to in December);
c) instructed Bank staff to investigate ways to implement outright purchase of corporate bonds;
d) announced that it will accept bonds issued by real estate investment trusts as collateral for its lending; and
e) announced plans for outright purchase of corporate financing instruments.
According to the BoJ, the markets for CP and ABCP are estimated to total JPY 13trn and JPY 4trn respectively, so the impact from purchasing JPY 3trn worth of CP should be especially significant.
Próximos "pasos"
Policy outlook: more unorthodoxy
As to what lies ahead on the policy front, the probability of reverting to the old quantitative easing policy (which ended in March 2006) seems remote,as Governor Shirakawa’s view is that, with the exception of the duration effect (the commitment to long-term maintenance of the policy), quantitative easing had absolutely no portfolio rebalancing effect because the instruments that the BoJ purchased to expand its balance sheet were not essentially different from reserves placed with the BoJ. That is why the BoJ is expanding the scope of the instruments it buys to include unconventional assets such as corporate bonds. There is the possibility that the BoJ might also buy stocks directly from banks, but that would depend on the willingness of the banks themselves. In any event, the number of financial instruments that the BoJ could buy is rather limited compared with the Fed. Direct financing is still limited in Japan, as bank loans account for the largest share of financing. A look at the balance of assets in the financial sector shows the fund balance of deposit-taking institutions is overwhelmingly huge.
As a result, there are really only a few financial instruments with significant market scale.
Stepped up JGB purchases if deflationary risks rise
In the event the risk of a deflationary spiral increases, BoJ will respond by supporting the government’s expansionary fiscal policies with largescale purchases of long-term JGBs (something similar to plans announced by the Fed on 16 December 2008). Currently, the BoJ’s outright purchase of long-term JGBs is not geared towards holding term rates down, but the BoJ would make that the aim of its JGB purchases if the risk of a deflationary spiral increases. Meanwhile, should JPY appreciation get out of hand, JPY-selling FX intervention by the government cannot be ruled out, and the BoJ would likely support this with massive fund provisions, leaving the intervention funds unabsorbed in the market, resulting in unsterilised FX intervention that should neutralise strengthening pressures on the yen.