TheChek News Flow

Central bank keeps monetary policy on hold despite improving outlook

The Bank of Japan is keeping monetary policy on hold as it seeks to avoid speculation about an early exit from stimulus and keep inflation moving towards its 2 per cent goal.

Japan’s central bank said on Thursday it would leave overnight interest rates at minus 0.1 per cent, cap 10-year bond yields at about zero per cent, and continue to purchase government bonds at a pace of ¥80tn ($720bn) a year.

The steady-as-she-goes message signals the BoJ’s determination to sustain its monetary stimulus despite an improving economic outlook.

While almost all analysts expected policy to be kept on hold, some believed the BoJ might drop its ¥80tn purchase target because it already owns a large share of the market and the yield curve cap makes a precise figure redundant.

However, some BoJ officials believe the volume of purchases is more important than the interest rate, and they have been reluctant to do anything markets might interpret as preparation for tighter policy.

“To start debate [about exit strategy] now would invite confusion from the market and thus it’s premature,” said governor Haruhiko Kuroda in a press conference. “The time to start on exit strategy is when we achieve the 2 per cent objective.”

The BoJ’s policy board voted for the move by a majority of seven to two. The two dissenters, Takehiro Sato and Takahide Kiuchi, will step down from the board this summer.

“Japan’s economy is likely to continue expanding and maintain growth at a pace above its potential,” the bank said in its quarterly outlook report published alongside the monetary policy decision.

It said inflation was likely to keep rising but the risks were to the downside. “On the price front, the momentum towards achieving the price stability target of 2 per cent is maintained, but is not yet sufficiently firm, and thus developments in prices continue to warrant careful attention.”

The policy board slightly raised its growth forecast for the year to March 2018, from 1.5 per cent to 1.6 per cent, but trimmed its inflation forecast from 1.5 per cent to 1.4 per cent.

Japan’s economy has gained speed because of a fall in the yen after the election of Donald Trump as US president. The unemployment rate has fallen to a 22-year low of 2.8 per cent.

Despite that, inflation has been slow to respond, with headline consumer prices up 0.3 per cent in February against the year earlier. Fresh data on inflation and unemployment is expected on Friday.

“There’s a high chance of achieving 2 per cent inflation in the year to March 2019, but it may also take longer than that to go above 2 per cent stably,” said Mr Kuroda.

The yen was trading slightly weaker at ¥111.3 against the dollar following Mr Kuroda’s press conference. The Topix share index was little changed at 1,537.

Benchmark Brent crude was down 30 cents at $51.52 a barrel by 0800 GMT, almost 9 percent below this month's peak. U.S. light crude was down 35 cents at $49.27.

Traders reported ample supplies in all key markets despite efforts led by the Organization of the Petroleum Exporting Countries (OPEC) and Russia to cut output by 1.8 million barrels per day (bpd) in the first half of the year to tighten the market and prop up prices.

OPEC is discussing extending its cuts into the second half of the year, but the group has an uphill task as oil inventories are near record levels in many parts of the world.

"It is clear that the world has plenty of oil in stock, making OPEC's life that much harder," said Jeffrey Halley, senior market analyst at futures brokerage OANDA in Singapore.

U.S. data on Wednesday showed a drop in crude oil stocks, but gasoline inventories surged as refiners produced more fuel than the market could consume.

"U.S. commercial stocks increased by more than 6.5 million barrels last week," said Tamas Varga, senior analyst at London brokerage PVM Oil Associates. "Stock rebalancing has been put on hold as U.S. commercial oil inventories have jumped."

U.S. crude oil production is also rising, up 10 percent since mid-2016 at 9.27 million bpd.

Rystad Energy expects U.S. shale oil output to grow by 100,000 bpd each month for the rest of this year and into 2018 if oil prices hold around $50-$55 a barrel, well above estimates by the U.S. Energy Information Administration for monthly gains of about 29,000 bpd in 2017 and 57,000 bpd in 2018.

"We see a risk for a weaker oil price towards the end of the year ... because shale is delivering so much oil," Jarand Rystad told Reuters.

Still, with an expectation that OPEC will extend its production cuts to cover all of 2017, analysts said there was support for prices around current levels.

"Brent oil looks neutral in a range of $51.30 to $52.32," said Reuters technical commodities analyst Wang Tao.

But activist shareholder welcomes S Korean group’s move to cancel $35bn of stock

Samsung Electronics will not convert into a holding company structure, rejecting a key demand from activist investor Elliott Management and dashing hopes of governance reform at South Korea’s biggest conglomerate. 

However, the technology group moved to placate investors with a plan to cancel treasury shares — composed of both common shares and preferred shares — worth Won40tn ($35bn).

The moves came after Samsung on Thursday reported its best quarterly operating profit in more than three years, driven by strong component sales. 

The mobile phones-to-semiconductors company said that adopting the structural change would hinder the company’s competitiveness and weigh on longer-term operations.

The decision came as Samsung endures political turmoil at home with Lee Jae-yong, the company’s vice-chairman and de facto leader, standing trial for corruption charges related to an influence-peddling scandal that toppled former president Park Geun-hye. Mr Lee denies any wrongdoing.

In order to set up a holding company, Samsung said its financial affiliates must divest part or all of their stakes in the company — a difficult task amid increasing legal and regulatory uncertainty due to pending parliamentary revisions to relevant laws. 

“Samsung concluded the risks and the challenging environment surrounding a change in the corporate structure would not be beneficial for enhancing shareholder value and sustaining long-term business growth,” the company said in a statement.

Elliott welcomed Samsung’s plan to cancel the treasury shares: “We are encouraged that Samsung Electronics has agreed to take the bold step of optimising its balance sheet. We think there is room for even more progress due to the company’s announced commitment to enhance its board.”

Samsung said the net cash of Won60.2tn on its balance sheet allowed it to cancel the shares — 13.3 per cent of outstanding stock — in two stages, cancelling 50 per cent of the holding now and the remainder next year.

The move boosted Samsung shares to a record high of Won2.2m on Thursday, pushing the price rise for the year to date to 22 per cent. Net profit for the first three months of 2017 jumped 46 per cent year-on-year to Won7.68tn ($6.8bn) as sales increased 1.5 per cent to Won50.5tn. Operating profit rose 48 per cent to Won9.9tn. 

“Even with Lee Jae-yong in jail, Samsung is doing pretty well. Stock has soared and it is introducing new products. People are trying to convince themselves maybe it is true that Korean chaebol can succeed even in the absence of family members,” said Kim Woo-chan, professor at Korea University business school. 

Samsung has forecast a boost in earnings in the coming quarters on the back of robust sales of memory chips and display panels. It is also counting on the new flagship smartphone, Galaxy S8, to salve its bruised image following last year’s costly safety debacle and ultimate demise of the fire-prone Galaxy Note 7 smartphone. 

Samsung said on Thursday that early sales of the new smartphone, featuring a new design and upgraded features, have been positive. The group expects the new phone, which went on sale on April 21, to outsell its predecessor the S7, which shipped 48.5m units in its first year.

The semiconductor division was the biggest driver of earnings, accounting for nearly two-thirds of operating profit. First-quarter operating profit from Samsung’s chip division jumped to Won6.31tn from Won2.63tn in the same period a year earlier, while the mobile unit had operating profit of Won2.07tn.

Samsung regained its global market leadership in mobile phones with 26 per cent of shipments in the first quarter, after being edged out of the top spot by Apple in the final quarter of last year, according to market researcher TrendForce. 

Samsung will face a threat from Apple’s revamped iPhone in the second half of the year but analysts say the company should also benefit from its expected supply of organic light-emitting diode screens for the new iPhone.