Bank of Japan:  fewer JGB purchases is the consequence of previous policy shift - BBH

Analysts at Brown Brother Harriman, are reluctant to recognize that the Bank oof Japan buying less long-term JBGs marks some kind of shift in policy.

Key Quotes: 

“The Bank of Japan Governor Kuroda has been urging patience with its extraordinary monetary policy.  Prime Minister Abe has, already this year, urged the BOJ to continue to support the economy through its policies.  The BOJ continues to formally target purchases of JPY80 trillion of JGBs. However, leaving aside the declaratory policy, operationally, the BOJ has changed tactics. In addition to its Quantitative and Qualitative Easing (QQE), in late 2016, the BOJ introduced a target for the 10-year bond yield (+/- 10 bp around zero).  This has been dubbed "yield curve control (YCC) because the BOJ has set a negative 10 bp deposit rate, and has a 10-year target.”

“Investors realized that the targeting the 10-year yield required buying few Japanese government bonds that the pure QQE. The BOJ, though, has not changed its formal target. On the other hand, the BOJ continues to buy other assets, including equity ETFs, J-REITS, and loans. In practice, this is what it means:  In the 2016 calendar year, the BOJ's balance sheet expanded by nearly JPY93.5 trillion.  In 2017, it expanded by JPY44.9 trillion. Moreover, without much fanfare, the BOJ reported that its balance sheet fell in December.”

“Earlier today, the BOJ bought JPY10 bln fewer JGBs of 10-25-year maturities than it did last time (JPY190 bln vs JPY200 bln) and bought JPY10 bln fewer JGBS maturing in more than 25 years (JPY80 bln vs JPY90 bln previously). Japanese yields rose and the yen strengthened as investors and reporters suddenly see tapering.”

“Rather than a new policy of covert tapering, the fewer JGB purchases (gross and net) is the consequence of the previous policy shift. That shift had signaled the move away from targeting the balance sheet itself to targeting interest rates. Therefore, we are reluctant to recognize that today marks some kind of shift in policy.”

“We have noted that one of key drivers of the dollar-yen exchange rate has been the US 10-year yield.  It might be the interest rate differential between the US and Japan, but with YCC, the Japan's 10-year yield has been stable and this means that the differential is driven by the performance of US Treasuries.  Last year the correlation, conducted on the percentage change of the US 10-year yield and the percentage change of the dollar against the yen remained at elevated level.”

“The North American market tried to take the dollar through the lows see in Asia earlier today (~JPY112.50) and failed.  Resistance is seen near JPY113.00.  More broadly, the dollar remains in a JPY112.00-JPY113.65/75 range as it has for the past month.  We suspect today's price action is more corrective in nature than the start of a yen rally spurred by a change in BOJ policy.”