Bank of Japan under pressure to normalise
The Bank of Japan will keep its policy unchanged for now. Positive price momentum gives the BoJ coverage to keep policy unchanged, despite speculation of premature normalization. However, the BoJ is clearly running out of time, and the market know this. While we can argue the data, the reality is that sustaining easing policy indefinitely is not an option.
In its Outlook for Economy and Pricing, both inflation and growth forecasts are expected to be revised higher. Global economic recovery will support Japan’s GDP growth. Consumer inflation should gradually improve (on Friday, Japan reported a core CPI increase to 0.5% from 0.2% in November), yet it remains below the 2% target. Meanwhile, the effectiveness of policy action and communication in weakening the Yen is decelerating. A rapid rise in US yields has uncharacteristically failed to boost USD/JPY appreciation. Moreover, lingering geopolitical risk (highlighted by US government shutdown) and potential disappointment in China growth could trigger JPY appreciation.
Long US shutdown unlikely
Monday promises to be stormy in the Senate. The long and arduous negotiations between Republicans and Democrats on Friday have ended to a zero point with regard to the Government budget validation. The main source of the issue being the withdrawal of the Daca program that protected young migrants called ‘Dreamers’ against deportation. Consequences are drastic as 700’000 government workers won’t be working on Monday and the coming week until the bill is finally signed! Remaining government services and deemed as ‘vital’ are for instance in air traffic control, domestic safety (e.g. military), national security and law enforcement agencies. However according to the Senate majority leader Mitch McConnell, the Republicans would be supporting a consent to support an immigration reform under the condition that Democrats agree to the government short-term financing bill until February 8th or longer, a rather temporary solution that should avoid additional damages that could cost billions.
From our perspective, the scenario of a long-lasting shutdown like the 16-day long that occurred during the ‘Obamacare’ healthcare reform negotiation and cost USD 24 billion according to Standard & Poor’s or the 27-day shutdown of 1995 regarding the health insurance program that concerns the US aging population are less likely. We remain confident that short-term bills remain passage solutions until all parties finally get an arrangement on the ‘Dreamers’ controversy.
