Bank of Japan has ‘limited’ options to spur growth if the trade war heats up further - Goldman Sachs

The Bank of Japan likely heaved a sigh of relief following Friday’s strong economic numbers, but the central bank will have to remain “on guard and prepared to do more” amid the present global uncertainty, said the chief Japan strategist at Goldman Sachs, Kathy Matsui.

However, the BOJ has “pretty limited” options if the trade friction between China and the U.S. becomes worse, according to Matsui.

Japan reported Friday that GDP grew at an annualized rate of 1.8% in the second quarter which ended in June. It was much better than a median forecast for a 0.4% growth.

It comes at a time when short-term interest rates in Japan has been unchanged at -0.1% since the BOJ adopted negative interest rates in January 2016. The country’s central bank has been struggling to meet an elusive inflation target of 2%.

“If the yen were to appreciate much further, let’s say (it) breaks the 100 barrier (against the dollar), I think that could force the BOJ’s hand to do something more,” Matsui told.

“They (Japan) obviously can take negative rates even further to negative territory but that is not without any cost,” Matsui said.

That cost would be borne by the country’s banking system, whose net interest margins are “already suffering” as a result of negative interest rates being set for a prolonged period of time, she added.