In the press conference after the BoJ policy meeting, the Governor Haruhiko Kuroda raised the hurdle to change the 10 year interest rate target by mentioning the output gap and the inflation expectation as the relevant factors and by dismissing the overseas factors. As the output gap is still negative, the linkage is tantamount to a commitment not to change the target in the near future. In case of a bond market selloff, the BoJ will be forced to support the bond market, draining the remaining liquid JGB assets from the private sector in the process.
The stock market may have liked the BoJ decision today as it decided to go easy on banks. However, we are doubtful if the positive market reaction would be sustained. In our view, the BoJ is effectively tapering its quantitative easing policy. By dropping two year time-limit to achieve the 2% inflation target, the BoJ will be less aggressive in its efforts to reflate the economy in future. By stepping away from negative interest policy, the BoJ is tying its hand to counter future yen appreciation. One issue is clear though. The BoJ has reached the end of the QQE road. It is no longer pursuing quantitative easing. At this point, the BoJ has two alternatives. One is to become passive, leaving the reflation effort to the government. The other is to somehow find a way to continue reflating the economy, perhaps by exploring a combination of fiscal and monetary policy tools. Today's decision indicate that the BoJ may be choosing the passive road, but it does not seem like the nature of governor Kuroda. We will see.
In their policy meeting on September 20-21, the BoJ will be essentially admitting that they can no longer pursue 2% inflation rate target as ardently as they have been. The financial market will probably react negatively as it perceives the change as a step toward tapering. In our view, the result could be similar to what we observed in the US “taper tantrum” in 2013.
The negative market reaction to the BoJ decision today was another evidence that the monetary policy in Japan is nearing its capacity limit. In our view, expanding ETF purchases to 6 trillion yen was a significant, even reckless measure. If the BoJ maintains the new pace of ETF purchases, a severe downturn in the equity market could deplete the capital of the BoJ in the near future. The BoJ has reached the end of its easing cycle and it knows it. Their policy statement today said they will conduct a comprehensive assessment of their policy effects at the next policy meeting.
It is a close call, but we think the BoJ is unlikely to ease in its monetary policy meeting on July 28-29. Aside from minor measures such as including municipal bonds or agency bonds in its asset purchase program, there are only a few meaningful easing measures the BoJ could undertake. They are, 1.cutting its policy rate, 2.expanding ETF purchases, 3.expanding its JGB purchases. However, all these measures have costs, and we think the BoJ is likely to judge that costs outweigh their benefit at this moment. So, expect Kuroda to surprise the market... again.
In the press conference following the policy meeting on June 16, BoJ Governor Haruhiko Kuroda implicitly warned the FX market against further yen appreciation. However, his warning lacks credibility as there seems little the BoJ could do to stop the tide. In our view, Kurodanomics whereby the BoJ declared to achieve its inflation target through aggressive monetary policy easing has lost all its credibility. Judging by nuances in the press conference, even Mr Kuroda does not seem to believe in the theory any more.
BoJ surprised the market again by standing still. The majority of street economists predicted an easing today. Their reasons vary, but we see one common theme. It is often argued that the BoJ needs to take actions to show its commitment to the inflation target while it admits a postponement of when it plans to achieve it. However, as we pointed out in a short comment back in September 2015, the BoJ seems no longer bound by time limits. The prediction as to when 2% inflation target would be achieved is a mere prediction, perhaps more of a wishful prediction, and definitely not a binding commitment.
The bank of Japan decided to lower the interest rate on excess reserves to -0.1% on January 29. In our view, the move constitutes a significant monetary easing and also enhance the effectiveness of its future easing when required. The change today was not merely a 20bp cut in its policy rate. The BoJ basically broke the zero bound on the interest rate. When we consider the dire long term outlook for the Japanese economy, a negative interest rate is in fact only natural. There is no reason that the BoJ should stop at -0.1%. Further negative economic news should prompt the market to price in further cuts in the policy rate. While there is no silver bullet in killing the deflation risk, the move today shows that the BoJ has the tools to fight the deflation risk if the global economic tide is to turn against the Japanese economy in 2016.
Despite the convoluted way the BoJ announced it today, the measures the BoJ implemented were nothing short of an easing in their monetary policy. In our estimate, the BoJ will be absorbing 12.5% more aggregate duration risk from the JGB market and increasing its equity purchase by 10%. Accepting foreign currency denominated assets as collateral also nudges Japanese banks to invest abroad, indirectly weakening yen. In our view, it was a positive surprise from the BoJ and the market is wrong to dismiss the measures as ineffective.
BoJ kept its policy unchanged as it concluded its two days policy meeting on October 30. While their inaction was in line with our expectation, the fact that so many economists misread its intention shows that the BoJ has a serious communication problem with the market. We also think that by choosing to keep its policy unchanged and hoping for an inflation to materialize, the BoJ is returning to its traditional passivism and making the Japanese economy vulnerable to a downside risk.
The Bank of Japan kept its policy unchanged when it finished its two days policy meeting on September 15. Listening to the press briefing given by the BoJ governor Kuroda, we feel that the time limits it imposed on itself are gradually fading away. Back in 2013 when Kurodanomics started, the bank aimed to achieve 2% inflation in 2 years. It seems it has become, 2% in some near future.
In our view, there is a fair chance, say 25-35%, that the BoJ may decide to ease when it concludes its two days policy meeting on September 15. We explain why in this short comment. In case the bank indeed decides to ease, ETF and J-REIT, rather than JGBs, are likely policy tools used in easing monetary conditions.
The Bank of Japan kept its policy unchanged on November 19. In the press conference after the meeting, the BoJ governor Kuroda took pains to maintain the distance between the bank and the government in order not to appear to criticize the decision made by PM Abe to postpone the sales tax hike while at the same time to evade the criticism that the BoJ is simply bankrolling the fiscal deficit. There was one unusual element to his press conference today though. Mr Kuroda is usually a very cheerful man, often visibly chuckling to the tricky questions posed by reporters. However, he was unusually sulky today.
BoJ kept its policy unchanged, but the policy statement as well as the press conference by the governor Kuroda dropped enough hints that the BoJ is gradually shifting its policy stance from a strongly-anti-deflation to a more balanced stance. The chance of additional monetary easing is becoming more distant and the bank seems more tolerant for a rise in long term interest rates.
Bank of Japan kept its policy unchanged on April 30. In the following press conference hosted by the BoJ governor Kuroda, he continued to imply that he sees no immediate need for additional easing. Interestingly, he also implied that the long term interest should gradually rise. The BoJ revised down its growth outlook for fiscal year 2014 by 0.3% point to 1.1% and made a subtle change in its outlook for inflation. Till the previous meeting, the BoJ forecast that the end of FY2014 and early FY 2015 as the timing when 2% inflation target is achieved, but in today’s meeting, it was changed to FY 2015.