Further BoJ stimulus unlikely in 2016, SocGen says

Further quantitative easing from the Bank of Japan in 2016 was not the most likely scenario instead, the second installment of Abenomics would require large fiscal stimulus measures, analysts at Societe Generale said.

That was because strong monetary policy had relied on a revival in domestic net demand for funds as deleveraging in the corporate sector eased, but now it was disappearing again, analysts Takuji Aida and Kiyoko Katahira said in a research note sent to clients.

Fiscal stimulus would drive renewed demand for funds, they argued, adding that "the momentum towards exiting deflation would resume".

The policy of negative interest rates on the other hand would be of only limited effectiveness as it applied to around just 10-30trn yen of account balances, versus total outstanding current account balances of approximately 300trn yen.

For SocGen the probbaility that the BoJ would ease further by the end of 2016 stood at just 30%.

Considering the large amounts of government bonds and exchange traded funds the BoJ was already purchasing, markets "are ikely to feel that a limit to monetary policy is approaching.

"The BoJ will probably want to hold on to its remaining opportunity for additional QQE and maintain its stance that it can act at any time – in order to prevent JPY appreciation and a bearish stock market."

If the yen appreciated more strongly, with usd/jpy moving below 105.0 then the odds of more quantitative easing (QQE) would rise to 40%, they added.

Lower negative interest rates, an additional 5trn yen boost to the annual monetary base would be the most likely tools under such a scenario.

Negative rates on loans to banks might also be considered as a supplementary measure.

"This would reduce the concern that the BoJ’s negative interest rate policy will have a negative impact on the financial institutions’ revenues and profits."

"As a result, there is a good chance of Abenomics reviving if net domestic fund demand expands through ample fiscal stimulus.

"Progress of ‘Abenomics’ : Abenomics is continuing its progress as Prime Minister Shinzo Abe implements more measures to meet his goals seen the new “three arrows of Abenomics”. The most successful reform progress of ‘Abenomics’ is in tourism and womanomics."