Japan cuts lending program by JPY 5trn

The fine tuning of monetary policy should have little impact on the financial markets and the real economy, says DBS.

DBS Group Research noted:

The Bank of Japan yesterday kept the overall stimulus package unchanged at JPY 70trn, while made a technical adjustment to expand the asset purchases by JPY 5trn to JPY 45trn, and cut the lending program by JPY 5trn to JPY 25trn.

This fine tuning of monetary policy should have little impact on the financial markets and the real economy. The BOJ decided to reduce fund supplying via the fixed rate loan program, because an undersubscription was recorded in the past few months.

The increase in the outright asset purchases announced yesterday was concentrated on treasury discount bills. The 3-12 month treasury bill rates and the 1-3 year JGB yields have already fallen to about 0.1%, broadly, approaching the overnight call rate of 0-0.1%. There is not much scope for the short term rates to drop further.

Ahead, it remains likely that the BOJ will add stimulus in August-October. The economic data for the second quarter to be released by August (including the 2Q GDP) could disappoint. The possibility of further monetary policy easing will begin to decrease after entering 4Q, however.

Unless the downside risks in the global economy intensify, growth in Japan is expected to pick up gradually from 3Q, as heralded by the recent improvement in leading indicators including the industrial production forecast and the Tankan survey on business confidence.

In our base case forecast, the economy should stay on the recovery path in 2013, as public spending on reconstruction will be sustained into next year, and consumers will likely front load their spending due to the expectations of a price jump resulting from the consumption tax hikes in 2014-2015 (pending approval by the upper house of the parliament).