James Smith, Economist at ING, suggests that despite a large stimulus package from the ECB, they would caution against assuming that the Bank of Japan will follow suit this week. Key Quotes “The market response to negative rates has been far from desirable, and the BoJ will be wary of making the situation worse with a rate cut at this meeting. Although we narrowly favour no action this week, any stimulus would likely be channelled through a small expansion of corporate bond and/or ETF purchases. On a trade-weighted basis, the currency appreciated by as much as 6% and currently trades around 3.5-5% stronger than before January’s meeting. Also, rather than encouraging interbank lending, the total amount outstanding in the call market has fallen by around 70%. Most importantly, though, the move appears to have woken markets up to the potential limits facing monetary policy. From an economic standpoint, things aren’t set to get any easier for the BoJ in the coming months. The bank’s preferred measure of core inflation has been driven higher by the lagged effect of JPY deprecation towards the end of 2014. But, the latest data indicates that core inflation has peaked and we expect it to trend back down below 1% over the coming months as the effect of higher import prices filter out. The growth outlook doesn’t look particularly encouraging either. For instance, weakness in consumption, which caused negative growth in 4Q15, looks to have persisted into the first quarter. Thus, the BoJ will remain under pressure to respond. However, we continue to believe that any stimulus is unlikely to come from an increase in the pace of JGB purchases. Looking at the equation purely mathematically, the BoJ could hypothetically boost the pace of purchases, but this would significantly bring forward the date at which it would have to begin tapering. But as this trade-off, and indeed the limits facing QQE, are now fairly well telegraphed, such a move risks prompting an adverse reaction, which given the situation with negative rates, is something the BoJ will be keen to avoid at the moment. However, if the BoJ did feel it necessary to act, it could “meet in the middle” and increase purchases of JGB-alternatives. Here, it might be tempted to take a leaf out of the ECB’s book and look at non-financial corporate bonds. This would not be entirely unprecedented, having bought ¥1 trillion of A-rated (or higher) corporate bonds in 2009. The main point here, like with ETF purchases, is that the market is small relative to that of government bonds so the effect may be fairly limited. But it is worth noting that as a proportion of GDP1, Japan’s corporate debt market (15%) is roughly the same size as the Eurozone’s (11%). Thus, as was the case with the ECB, the size of the market is unlikely to deter the BoJ from going down this route. Having said all of this, our base case, at least for this meeting, is that the BoJ will remain on hold. Until the dust settles on negative rates, we think the policy board will be keen to wait and see things evolve before the April meeting, when it releases its quarterly outlook report (and historically, when the BoJ has preferred to make policy changes). But with the economic outlook fairly uncertain, further easing in April continues to look relatively likely.” For more information, read our latest forex news.