- Bank of Japan kept the pace of QE unchanged at the March meeting…
- …but is likely to step up monetary easing going forward, which will weigh on the yen
- US small business confidence unexpectedly slipped, though wages continued to rise
BoJ likely to step on the gas in coming months, leading to further yen weakness
On Tuesday, the Bank of Japan left its policy unchanged, maintaining its pledge to expand the monetary base at a pace of 60-70 trillion yen per year. This was in line with market expectations and the yen barely moved. Japanese stocks responded more positively though. We expect the yen to weaken noticeably in the coming months. First of all, we think that a stepping up of monetary stimulus is likely to be needed after the sales tax hike is implemented in April to revive the economy’s momentum. The economy grew at a much slower pace than market expectations in the last quarter of 2013. Furthermore, though incoming data show that economic growth in the first quarter of this year is likely to be strong, household and business confidence outlook in the second quarter have deteriorated. In addition, labour cash earnings continued to contract at a sharp pace in January in real terms. This will put a dent on consumer spending. This poses a risk to the BoJ’s optimistic projections that growth will remain above the trend rate after the VAT hike in April. Another factor that will weigh on the yen is the increasing pressure for the Government Pension Investment Fund (GPIF) to increase returns to fund rising pension liabilities. As a result, the government advisory panel has stated that the GPIF should reduce passive investments and increase their overseas stocks and bond allocations. Such a change in strategy would be a negative for the currency if it is not fully hedged. Finally, we expect the US economy to accelerate (as it shakes off the bad weather) and the Fed to continue to taper its asset purchases, leading to widening interest rate differentials relative to Japan.
US Small business optimism unexpectedly declines…
In the US, the NFIB Small Business Optimism index unexpectedly fell from 94.1 to 91.4 in February, which was lower than the consensus forecast of 93.8. The outcome ended three consecutive months of increases and brought confidence to the lowest level since March of last year. It is a bit of a mystery to us why confidence fell back so much, though most likely it relates to the cold winter weather. Looking at some of the details of the report, the plan to hire sub-index declined by 5 percentage points to 7%. This more than undid January’s gain (from 8% to 12%), though the sub-index remains on a modest upward trend. Meanwhile, the actual capital expenditures sub-index fell from 59% to 57%. This marked the second monthly drop and is most likely an ongoing response to the ending of business expensing rules in December that had boosted the index to 64% in that month. That said, the outlook for investment, helped by record high profitability remains good, and so far we have not seen a big reaction to the ending of these rules in the monthly capital goods shipment data. Moreover, 25% of firms expected to increase Capex expenditures in the next three to six months, which apart from December (26%) marked a post-recession high.
…though firms continue to raise employees’ compensation
Small firms also continued to raise employees’ compensation, with the net percentage of businesses that raised compensation over the past three to six months staying at 19%, a post-recession high. This sub-index tends to lead the hourly wage data and adds to evidence that labour market slack continues to slowly disappear. This also became evident in yesterday’s Job Openings and Labor Turnover Survey, which showed that the number of unemployed per job opening remained at 2.6 in January, the lowest number since the recovery. While higher wages will support consumption, inflation is likely to remain quiescent in the near time, as a large parts of the increases in wages are still being absorbed by gains in productivity.