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Chief economist update: BOJ takes breather on stimulus sprint

The Bank of Japan (BOJ) took a breather in July, keeping its monetary policy settings and asset purchases unchanged, promising that: "For the time being, the Bank will closely monitor the impact of the novel coronavirus (COVID-19) and will not hesitate to take additional easing measures if necessary, and also it expects short- and long-term policy interest rates to remain at their present or lower levels."

This is understandable given the sprint of policy stimulus measures the Japanese central bank announced over the past few months in efforts to mitigate the nasty impact of the coronavirus pandemic on its domestic economy.

In an emergency meeting on March 16, it doubled the annual pace of ETF and other risky assets purchases to ¥12 trillion from ¥6 trillion; introduced a new operation providing loans against corporate debt; and, raised the upper limit to purchase CP and corporate bonds by ¥2 trillion in total to ¥3.2 trillion and ¥4.2 trillion, respectively.

At its April meeting, the BOJ removed the limit on JGB purchases so that 10-year yields will remain at 0%, and increased its purchases of corporate debt to ¥20 trillion from around ¥7 trillion, as well as increasing its purchases of J-REITS to an annual pace of ¥180 billion.

In May, it launched a new lending program worth around ¥30 trillion to support small businesses.

At its June meeting, the BOJ increase the size of its corporate support package from ¥75 trillion to ¥110 trillion (US$1 trillion).

These, along with the government's fiscal stimulus and the re-opening of the economy - following Prime Minister Shinzo's lifting of Japan's state of emergency on May 25 - have produced some green shoots.

This is underscored by the improvement in the au Jibun Bank Japan PMI surveys. The composite index moved closer to the expansion mark, rising to a reading of 40.8 in June from 27.8 in May and the all-time low reading of 25.8 recorded in April. The services PMI jumped to 45.0 in June from 26.5 in the previous month - an indication of the improvement in domestic activity -- and the manufacturing PMI improved to 40.1 from 38.4 in May.

As such, the BOJ's baseline scenario is for the economy "to improve gradually from the second half of this year through the materialisation of pent-up demand and supported by accommodative financial conditions and the government's economic measures".

However, it also warned that: "Until effective medicines and vaccines are developed, it is highly unclear how the COVID-19 pandemic will evolve and how long it will take for it to subside. In particular, if a second wave of COVID-19 occurs on a large scale, economic activity is likely to be constrained significantly again. In addition, households' and firms' behaviour at home and abroad is also uncertain, with people continuing to voluntarily make precautionary efforts until COVID-19 subsides."

Read our full COVID-19 news coverage and analysis here.

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