Early Tuesday in Tokyo, Japan will announce revisions to Q4 GDP. A downward revision to business spending risks shaving the initial estimate from a contraction of 1.4% at an annualized rate to 1.5%. Regardless, the key takeaway is that the world’s third-largest economy contracted in two of the four quarters last year. Recall Initially, the consensus was for a 0.8% annualized contraction in Q4. The anticipated revision means the contraction was nearly twice as much as initially expected. 

Local press report spurred expectations that the Abe government was considering another supplement budget. However, rather than come at the end of a fiscal year, as they have consistently since 2011, the thinking was this new one could be front-loaded. Prime Minister Abe denied the reports over the weekend. 

Many investors have expressed concern about central banks losing credibility. For others, the point is that monetary policy has reached a point of diminishing returns. A few days after telling a television audience that negative interest rates were not under consideration, BOJ Governor Kuroda adopted negative interest rates on a 5-4 vote. The term of one of the dissents will expire shortly, and the replacement is likely to be more amenable to the Governor.  

Nevertheless, Kuroda’s assurances that another rate cut is not on the table at this month’s meeting (March 15) are taken with a large grain of salt.  That said, we recognize in the criticism of Japan levied at the G20 meeting meant that a follow-up rate cut in March was unlikely. That does not mean that the BOJ has in fact exhausted its monetary policy. It simply means further macroeconomic deterioration is necessary for the BOJ to cut rates again. 

Such an opportunity may not materialize in Q2. The consensus is for the economy to expand again in Q1 and Q2 at an average annualized pace of 1.3%. While the rise in oil, and commodity prices more broadly, may boost price pressures, the appreciation of the yen (around 6% on a trade-weighted basis since the end of last year) will likely dampen import inflation.