- BoJ fine-tunes monetary policy, but no significant easing measures
- BoJ purchases mainly aim to maintain the cap on 10Y yields, which will support bank profits
- Central bank vows to overshoot its 2% inflation target, but commitment to overshoot inflation still lacks credibility
- Initial market reactions positive, but we think that easing efforts are too limited to meet the inflation goal and support the weak economy.
- We expect the BoJ to announce further easing ahead in order to meet its commitment of overshooting the inflation target, but it will likely be too little too late.
BoJ fine-tunes monetary policy, but no extra stimulus
The BoJ wrapped up its two-day monetary policy meeting with some fine-tuning of its monetary policy toolkit. The measures taken are more modest than expected. It has decided to influence the steepness of the yield curve and to set a target for 10-year bond yields at around zero, while it abolished its existing guideline for the average remaining maturity of JGB purchases (7-12 years). This is a measure that will help bank profits, but not directly stimulate growth or inflation. It also vowed to overshoot its 2% inflation target. The BoJ mentioned that it will continue expanding the monetary base until the year on year rate of increase in the core CPI exceeds the price stability target of 2% and stays above it in a stable manner. However the BoJ announced no new stimulus. It kept its negative policy rate on hold at -0.1% and the pace of QQE will remain broadly the same. They did not increase ETF purchases, but refocused the criteria for indexes being targeted with ETFs.
Mainly yield control
This means that the BoJ will purchase 10-year bonds at any price to maintain the cap. However, the BOJ will not have a rigid target for expanding the monetary base as it did before when trying to target different maturities. Moreover, by vowing to overshoot its 2% inflation target and eliminating a time frame of earliest possible within a two year period for reaching it. This goal suggests that the BoJ is seeking more flexibility to achieve the target.
We think that the BoJ will start signalling further easing ahead once there is more clarity about the Fed’s monetary policy stance. Japan’s inflation on all measures has been trending down, while the economy is still growing below trend. We think that this all suggests that the BoJ will have to further stimulate the economy. We think that the measures announced today will have little impact on the economy. Investors have initially reacted positively, 10y yields edged up and the yen depreciated slightly, but the USD/JPY strengthened shortly afterwards. We expect hedging of foreign currency flows to support the yen above 105 against the USD, so we maintain the 2016 year-end USD/JPY forecast of 103.