April 27 2017, 21:00 JST

BOJ keeps mum on exit policy while silently tapering its JGB purchase

In the April 26-27 policy meeting, the Bank of Japan (BoJ) made minor adjustments to its growth and inflation outlook, but there were no changes in its generally cautious view. The BoJ sees inflation gradually rising to 1.9% year on year in the fiscal year 2019. It is important to note that it is below its 2% target. In the press conference after the meeting, governor Kuroda was bombarded with questions on the exit strategy, but the governor flatly refused to provide any answers, saying it is too early. He may be right, as the BoJ does not see itself exiting from the current easing policy in its forecast horizon.

Or, it is also possible that governor Kuroda refuses to answer because the BoJ does not have any safe exit strategy it could present to the public. In our view, it is highly likely that the BoJ will suffer sizable losses when it needs to adjust its monetary policy to cope with higher inflation environment. It is also possible that the BoJ may suffer sizable losses even without the consolation of having reflated the Japanese economy. In our view, it is in fact a matter of time that the BoJ suffers trillions of losses on its growing equity ETF holding. By early 2018, the BoJ will have bought over 20 trillion yen of equity ETFs. A downturn in the equity market will impair BoJ’s capital, wiping out its capital in a severe downturn. 

Bank of Japan Balancesheet

In any case, the BoJ’s monetary policy is becoming increasingly opaque. In its statement today, it kept its guidance to purchase JGBs at the rate of 80 trillion yen per year. However, it is becoming clear to us that the BoJ has already started to reduce, or, taper, its JGB purchase. The year on year increase in the BoJ’s holding of JGB has been declining in the past few months. Lately, the year on year increase is more closer to 70 trillion yen, rather than 80 trillion yen. 

Bank of Japan Balancesheet

In the area of Treasury Bills, the BoJ is already reducing the level of its holding.

Bank of Japan Balancesheet

In our view, the “exit” has already started. It is only that the BoJ is deciding not to tell the market in advance. Not telling its policy to the market may work in keeping the calm in the market, but only for a short time, in our view.