BoJ rapid response: From QQME to NIRP to YCC – Westpac

Rob Rennie, Research Analyst at Westpac, suggests that like many he went into the BoJ expecting to see some significant monetary policy developments and we did saw some developments, but certainly not in the expected areas.

Key Quotes

“What the BoJ did not give us:

·         We had expected to see more NIRP announced. The key point here is that Japanese banks are literally stuffed with cash. Over the March 13 to March 16 QE period, the BoJ bought ¥223tn of securities. Over that period, cash on depository corporations rose by ¥226tn. Doing nothing more on NIRP we find disappointing.

·         Rather than increasing asset purchases as some expected, the BoJ is now less committed to its current asset purchase target. The BoJ no longer refers to the ¥80tn monetary base target. The individual asset purchase programs are left unchanged, however, the new yield curve control policy means by definition that the JGB asset purchase program can no longer be a hard target – some months they will buy a lot; some months they will not.

·         The BoJ also scrapped the maturity target on its bond buying program.

·         We had also expected to see a discussion around the limits to QE going forward given the increasing visible signs of JGB scarcity on domestically licenced bank balance sheets. There was no mention of these issues within the comprehensive review.

What the BoJ did give us:

·         The BoJ now has an inflation overshoot framework and a commitment to make policy adjustments as appropriate to reach this target. While financial markets should reward such a target in the first instance, there will likely remain a nagging doubt given they haven’t come close to achieving let alone overshooting in the past.

·         The commitment appears open ended and the BoJ is looking to hit its inflation target at “the earliest possible time”.

Conclusion

Given the lack of fresh tangible policy, we are disappointed by today’s BoJ outcome. However, we like many went into the meeting expecting to be disappointed, thus, the ¥ had strengthened on a trade weighted basis and JGBs have sold off/ curve already steepened into the meeting. Thus the initial market reaction, i.e. a weaker ¥ and bounce in Nikkei makes some sense. However, the lack of commitment to regular systematic asset purchase, lack of more NIRP and fresh policy initiative, plus the nagging doubt that the 2% inflation target can be achieved let alone an overshoot leaves us expecting further ¥ strength as disappointment sets in. We have been expecting USD/JPY to test and break 100.Notwithstanding the risks surrounding the FOMC tonight, we remain of that view.”

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