This week, two central banks had their final policy meetings. The Federal Reserve zigs left as it tightens its Quantitative Easing program. And, the Bank of Japan (BOJ) zags right as it spends relentlessly. A new year is on the horizon, and so is a wider policy gap… With all fairness, it’s understand that the BOJ wants to keep things as is. Business sentiment is at a six-year high, according to the latest Tankan survey.
Now, Japan can kiss 15 years of deflation goodbye as consumer prices are steadily rising. But come 2014, the BOJ will have to do some changing and rearranging. The central bank may be reaching for the stars with its self-imposed goal of reaching a 2% inflation in two years. Economists and even some BOJ board members alike are feeling doubtful of the validity of such an extreme target. Not to mention, there’s a planned sales tax hike in the wings.
Nomura‘s (NMR) Chief Asia Equity Strategist, Michael Kurtz, says, “In terms of whether they can hit the 2% CPI target under current settings, it’s beginning to look probably a little unlikely… But we have to keep in mind of course that the economy will be hitting a pretty substantial speed bump with the increase in the consumption tax, which will be coming in April, from 5% to 8%, and that will quite naturally have a dampening effect on private consumption.”
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The BOJ’s hand will expectedly be forced by its urgent need to keep its inflation goal and offset the tax hike. Almost two-thirds of Japanese companies feel that the BOJ can boost its stimulus in the first half of year 2014, per a Reuters survey. Nomura’s Michael Kurtz agrees as well.
Nomura’s Chief Asia Equity Strategist, Michael Kurtz, says, “It’s probably around the time of the second quarter, when that consumption tax increase comes, that the BOJ will see the strongest incentive to increase the amount of quantitative easing to try to offset that impact from the tax increase.”
Reuters Reporter, Yonggi Kang, says, “Another round of stimulus could weaken the yen further, which is good news for Japan’s exporters. But given that the BOJ already delivered an intense stimulus burst this year, the market impact could be more limited. And even more investors will be wondering what happens when the spending is finally scaled back.”