Wednesday is a day of central banking news, starting with a policy update from the Bank of Japan, which will draw wide attention in the wake of Monday's disappointing report on third quarter GDP. Later, the Bank of England releases the minutes from its recent monetary policy meeting. The Federal Reserve will publish minutes today as well (19:00 GMT), but first we’ll see an update on residential construction activity for the US.
Japan: Bank of Japan Press Conference (07:30 GMT) Monday’s surprising news that Japan’s economy contracted in the third quarter has introduced a new phase of uncertainty for the world’s third-largest economy. For the immediate future, the second-consecutive stumble in quarterly GDP focuses attention on whether the government will unleash yet another round of stimulus measures.
Japan's GDP slump makes austerity look like a bad idea, and The Bank of Japan may be considering a game plan designed to stimulate consumption and growth. Photo: Thinkstock
With Japan slipping back into recession, new doubts are weighing on Abenomics, the monetary and fiscal stimulus policies advocated by Prime Minister Shinzo Abe. At the moment, the prima facie evidence is damning. “No part of Japan’s economy looks encouraging,” noted the chief economist at Dai-ichi Life Research Institute.
Although the outlook for policy is muddled at the moment in terms of what Japan’s GDP slump implies for the weeks and months ahead, the discouraging economic news prompted Abe to postpone a disputed sale tax increase that had been scheduled for introduction next October. The prime minister also dissolved Parliament and called for a new election – two years earlier than expected.
Speaking at a news conference yesterday, Abe said that “I am aware that critics say ‘Abenomics’ is a failure and not working, but I have not heard one concrete idea [about] what to do instead ... Are our economic policies mistaken, or correct? Is there another option?” Answering his own question, he concluded that Abenomics is "the only way to end deflation and revive the economy".
Does that mean that today’s policy announcement from the Bank of Japan (BoJ) will outline a new game plan? Perhaps, although the recent monetary stimulus was reportedly given a green light on the assumption that the government would take steps to reduce the country’s high debt load by raising taxes and trimming spending. But austerity suddenly looks like a bad idea.
It’s unclear how the BoJ will react, which is why today’s interest rate decision and the subsequent press conference will be closely monitored. Most economists expect that Japan’s monetary policy will remain unchanged for the moment, but the market will be keenly interested in the nuances of the spin in the BoJ’s commentary. Indeed, BoJ Governor Haruhiko Kuroda has recently offered relatively encouraging observations on the economic outlook. Given the latest turn of events on the macro landscape, however, it seems reasonable to assume that he'll manage expectations down. 
UK: Bank of England Minutes (09:30 GMT) Yesterday’s news of a slight rise in the annual pace of consumer inflation in October to 1.3% compared with 1.2% in the previous release caught some analysts off guard. But the uptick from a five-year low is probably a temporary increase that will soon give way to more disinflation in the months ahead. One reason for expecting pricing pressure to remain soft is the bearish trend in energy prices of late. Brent crude, for instance, has fallen more than 20% over the last three months. Adding to the potential for lower inflation is the softer numbers for the global economy.
BoE officials have certainly been clear about expectations for lower inflation in the near term. Last week’s Inflation Report projected that consumer inflation will soon dip below 1%. The BoE’s chief economist emphasised the disinflationary outlook on Monday when he spoke at a conference and noted that UK inflation is below target, which he is “watching like a dove".
It’s fair to say that downside risks are in the driver’s seat at the moment and so the odds of a rate hike are quite low for the foreseeable future. That’s also the implicit message in the ongoing slide in the pound relative to the US dollar: the GBPUSD has been trading at or near 14-month lows in recent sessions.
Today’s minutes for the last monetary policy meeting are widely expected to reconfirm BoE’s subdued outlook on inflation. In turn, the news will provide a new reason for expecting the bearish GBPUSD momentum to roll on.
US: Housing Starts (13:30 GMT) Yesterday’s surprisingly strong reading on homebuilder sentiment suggests that that the housing sector remains on track to deliver modest growth. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) rose to 58 for November, a healthy gain over October’s reading of 54. Any reading above the neutral 50 mark reflects the fact that a majority of builders are optimistic about business conditions. With the latest update showing the index close to a nine-year high, the outlook for housing is looking a bit more bullish these days.
Then again, it remains to be seen if today’s hard data on residential construction for October will provide a similarly upbeat assessment. Recent updates on starts and new building permits reflect a sluggish trend this year, which contrasts with last year's strong gains. Nonetheless, economists expect that today’s release for housing starts will deliver a modest round of growth—an annualized rate of 1.028 million units for October, up slightly from 1.017 in the previous month. That’s a relatively tepid gain, but it's enough to inspire a mildly bullish outlook, although the latest HMI data holds out the promise for stronger results down the road.
“Low interest rates, affordable home prices and solid job creation are contributing to a steady housing recovery,” NAHB’s chief economist said yesterday. “After a slow start to the year, the HMI has remained above the 50-point benchmark for five consecutive months, and we expect the momentum to continue into 2015.” 
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