December 18, 2015, 20:00 JST

Market should not dismiss the BoJ move

According to Governor Kuroda, what the BoJ did today was not an additional easing, but a tweak to the current policy. In its policy statement, the BoJ is calling it “Supplementary Measures”. During the press conference following the policy announcement, Governor Kuroda stressed that the BoJ’s stance on the economic outlook remains unchanged and he is confident that the current easing strategy is working as planned.

For those who feel that these play of words are too Japanese to understand, you have our sympathy. The measures the BoJ took today are nothing short of an additional monetary easing. The BoJ will be buying longer duration JGBs in an effort to flatten the yield curve, increasing its equity ETF purchase from 3 trillion yen a year to 3.3 trillion yen a year. The BoJ is also expanding the scope of collateral it accepts to include foreign currency denominated loans and housing loans. These measures altogether may not be as significant as the measures the BoJ unveiled in April 2013 (QQE1) and in October 2014 (QQE2), but they are easing measures nevertheless. So, if not QQE 3, may be QQE 2.1 ?

Easing the monetary policy while claiming it is not reduces the effectiveness of the monetary policy. The BoJ should know better and it is consequently being punished by today’s market reaction. However, in our view, the market is wrong to dismiss the measures the BoJ announced today. Unlike ECB who failed to deliver what markets expected, the BoJ eased today when markets were not expecting any. Extending the maturity of the JGBs the BoJ purchases is the most important measures the bank announced today and the effect should be felt on the longer end of yen yield curves. In our estimates, the BoJ will be absorbing 12.5% more duration risk from the JGB market in 2016. The BoJ is now scheduled to own 50% of the JGB duration risk by June 2018, about a half year earlier than under the previous easing policy, QQE 2.0.

Governor Kuroda also made clear that the BoJ intends to lower the interest rate across the yield curve. Wider interest rate spreads between yen and other currencies should lead to further yen depreciation. In our view, what the BoJ did today was a positive surprise to the Japanese economy.