After a few years of relative apathy, today’s Bank of Japan statement is greeted with considerable anticipation as it may well have some significant impacts on global markets, judging by the last two weeks’ action after hints at BoJ policy shifts.
Background:
Japan’s economy is shrinking once again…
Industrial Production is plunging…
As a reminder, The BoJ cut its inflation forecast at the last meeting…
But the most-watched item in today’s statement will be with regard Yield Curve Control (YCC) as recent source articles have suggested that the BoJ will discuss potential policy changes to its YCC framework on the basis of sustainability, not tightening, of monetary policy which could lead to an adjustment of the yield curve target – where the 10Y JGB trades – to allow a long-term natural rise. This is said to be the cause due to the central bank’s admission that it may take even longer to hit the 2% price target, and therefore would need to ensure its policy measures can be sustained, while a policy tweak could also help alleviate some of the side-effects from its prolonged ultra-loose policy which has squeezed banks’ profits.
And yet, few expect that the BOJ will make an explicit YCC determination today, as an increase in the JGB yield target appears unlikely at a time when it is expected to revise downward its inflation forecast; instead in consideration of the adverse side effects of its policy, the BoJ will likely declare at the end of its statement that, based on its analysis in its quarterly Outlook Report, that it will maintain its easing policy for an extended period but will conduct financial market operations and asset purchasing operations to address the mounting cumulative side effects.
And in case there is a negative reaction to this apparent ‘tightening’, one likely easing measure to deal with such side effects will include an overhaul of its JPY6 billion ETF purchasing operations, a shift from Nikkei 225-linked ETF to Topix-linked ETF, which would likely spur investors to follow suit in rebalancing their portfolios should this materialize.
And finally, while ‘officially’ The Bank of Japan has not shifted its bond-buying program’s scope, in practice it has been tapering dramatically… forced by liquidity constraints in the market.
And it is this forced tapering that confirms the lack of sustainability of its bond-buying program that The BoJ has expressed concern about.
“Market players have come to realize that the bond-purchase operations aren’t directly linked to monetary policy,” said Mari Iwashita, chief market economist at Daiwa Securities Co. in Tokyo. “Their action is dependent on conditions and does not indicate anything special in store.”
As a reminder, introduction of yield-curve control: 1:18pm (0018ET) on Sept. 21, 2016, meaning today’s announcement is the latest since then.
Having kept investors waiting for the longest time since Sept 2016’s yield curve control announcement, The Bank of Japan – desperate to avoid a repeat of 2013’s Fed-driven taper-tantrum – kept policy the same aside from a nuanced shift in language around the bond operations.
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BOJ Maintains Policy Balance Rate at -0.100%
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BOJ Maintains 10-Year JGB Yield Target at About 0.000%
But here’s the twist:
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BOJ to Allow More Flexibility in Bond Operations – allowing upward and downward movement in yields
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BOJ to Act Promptly in Case of Rapid Increase in Yield
And as we suspected:
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BOJ Shifts ETF Allocation Further to Topix From Nikkei
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BOJ: ETF Puchases Amount May Change on Market Conditions
Additionally, BoJ cut its inflation outlook for FY18, 19, and 20.
The BOJ repeats that it remains committed to QQE with YCC (ensuring a dovish perspective).
Finally BoJ confirmed it intends to keep very low rates for “extended period of time.”
And the reaction in USDJPY and JGBs was very clear… (USDJPY has been glued to 111 the figure for the last 48 hours or so). Bonds are bid (unwinding the yield spike from last week’s rumors, but Yen is weaker)…
And Treasuries are bid too on modest relief that The BoJ did not go full taper tantrum…
Kuroda triued to use powerful language but the BOJ statement itself underscores that this isn’t a policy change – “Strengthening the Framework for Continuous Powerful Monetary Easing.”
The bottom line is this allows The BoJ to continue its stealth tapering and be flexible enough to act if yields suddenly spike (or back away when there’s no liquidity and not make it a spectacle).
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