BOJ: Three Dimensions of Easing

Published on September 15, 2016

One would be hard pressed to recall a major central bank meeting where expectations were as across the map as they are for the upcoming meeting of the Bank of Japan next Thursday.

That said, we believe the contours of a consensus between the three key BOJ Board members — Governor Haruhiko Kuroda and his two Deputy Governors, Kikuo Iwata and Hiroshi Nakaso — and the Monetary Affairs Department, finally appear to be taking shape, although there does not appear to be consensus among all Monetary Policy Board members yet.

Here is what we expect along all three dimensions of the BOJ monetary policy of “QQE-NIR,” or Quantitative and Qualitative Easing with a Negative Interest Rate:

* Kuroda and his colleagues will abandon the two year time frame for hitting the elusive, self-imposed 2% inflation target, in favor of a flexible goal of hitting 2% “at the earliest possible time.”

* While still controversial, the BOJ will nevertheless focus on deeper cuts to the current negative 0.1% deposit rate. We expect a modest cut lower to -0.2%. In light of the disastrous response from the Japanese banking sector and markets to the initial surprise foray back in January into negative territory, and questions raised by the Financial Services Agency over the potential negative impact of a deeper cut on the profitability of the banking industry, Kuroda is now actively prepping the public, markets, and his more reluctant colleagues for that eventuality.

* That move could come later, as some analysts seem to expect, or as soon as at next week’s meeting. Given the BOJ desire to present its next round of policy actions as a timely and effective response to the comprehensive review it has undertaken of its existing policies (which we expect will all be vindicated), we suspect Kuroda may push for action next week, and so assign a substantial although perhaps still no more than even, call it 50%, chance of a cut at this meeting.

* In order to offset the potential losses to the deposit-heavy Japanese banking institutions, and in a radical revamp of policy and an experiment in shifting the all-important inflation expectations, we do expect the BOJ will actively manage the yield curve higher as has been widely reported. The BOJ had also studied other options for offsetting bank losses such as through ECB-style measures like negative rate loans to banks, but the focus now seems to be more on directly managing the yield curve.

* We do NOT expect the BOJ to decrease its total 80 trillion yen per month pace of purchase of JGBs in order to achieve that steepening of the curve, as that would result in overly tightened financial conditions. Along those lines we also do not expect the BOJ to shift to a 70-90 trillion yen range for purchases as widely reported, as that could also be seen to signal an undesired and clearly premature path towards tapering.

* We instead expect the BOJ to “twist” and front load purchases into the below 10 year JGB range, and buy less out on the curve, while keeping its total purchases at least at 80 trillion yen per year.

* Indeed we believe there is a good chance the total purchases will be increased, or if a new range is to be set, we expect it would be set with a floor at 80 trillion yen for a range of say 80-100 trillion yen. It would mean the BOJ would be easing both on rates, and along the “quantity” dimension of policy on the BOJ’s “three dimensions.”

* Expanding into the third, “quality,” dimension — expanding the scope of purchases into other asset classes — is more limited as a policy lever and has received little attention from analysts and reporters. But we believe that may accompany an ease to signal the BOJ pledge to do all it takes.

*That would likely entail an expansion of purchases into local government bonds, J-REITs, and corporate bonds. As for stock ETFs, the BOJ just expanded the schedule of its purchases at the last MPM meeting, so they will wait and see on that for a while.

* Finally, Kuroda will, in his public communications, stress that monetary policy actions are and will need to be accompanied with aggressive fiscal policy measures, ideally taken at the same time. That could on the margins argue for the BOJ to hold out for some easing measures to coincide with the rollout of Prime Minister Abe’s fiscal stimulus program later in the fall.

Back to list