Japan: The BOJ’s Shifting Focus

Published on March 24, 2016

The Bank of Japan raised eyebrows today when it lowered its offer for 10-25 year Japanese Government Bonds from 260 billion to 240 billion yen and for JGBs with maturities of over 25 years from 180 to 160 billion yen, while keeping offers for securities in the 1-5 year maturity range unchanged.

That was accompanied by a leak in the Nikkei newspaper from an unnamed BOJ official indicating that the BOJ’s recent money market operations reflect a shift in focus from the expansion of money supply, which has had little impact, to pushing down rates.

*** It is our understanding that the BOJ does indeed appear to have shifted its focus from money supply expansion to lowering interest rates in the markets, especially short rates. The BOJ has already stepped up purchases of corporate bonds and Commercial Paper. ***

*** And while central bank officials say such purchases are not for supplying money but for short-term market operations, it is no accident that Mitsui-Sumitomo Financial and Lease, one of the subsidiaries of Mitsui-Sumitomo Bank, just issued CP at negative interest rates for the first time ever this month. The BOJ actions have clearly had the consequence, and we believe been pursued with the deliberate aim, of lowering interest rates aggressively in both the primary and secondary markets. ***

Limited Economic Impact

The goal of purchasing 80 trillion yen of JGBs a year is official BOJ policy, and to change that amount, an approval by vote at the monetary policy meeting is needed.

But that 80 trillion yen is for the purpose of inflating the monetary base, and out of that amount the BOJ has the flexibility to change the mix of its purchases between JGBs, corporate bonds, or CP for short-term money market operations.

Many economists and BOJ watchers in Tokyo by and large agree that money supply expansion in and of itself to date has had little to no effect on the real economy.

Even with the aggressive increase in the monetary base of around 30% y-o-y, M2 has been increasing by only about 3%, mainly due to the of lack of borrowing needs by households and corporates – in other words as a result of the proverbial “pushing on a string.”

Indeed it is estimated that Japanese banks would have held 23.194 trillion yen in their current account at the BOJ if the BOJ had introduced negative interest rates back in January. That amount was actually 23.084 trillion in February, which was almost the same amount as in January, even after the introduction of negative interest rates.

That is because banks still see little additional borrowing demand given the sluggish economic recovery, so they have been leaving the amount of money held in current accounts almost intact. In other words not only the expansion of money supply, but even the charging of negative interest rates on banks’ current account deposits does not seem to be providing much additional support.

Of course who is to say how well the strategy of lowering the interest rates even further from here will work to stimulate the Japanese economy, given that present problem is not the level of interest rates per se but weak domestic and overseas demand?

But the BOJ at this point has limited additional remedies for the economy.

Hand-off to Fiscal Policy

And truth be told, officials at both the BOJ and Kasumigaseki bureaucrats appear more focused on formulating an economic stimulus package in preparation for the May G7 Summit Meeting in Japan, and on laying the political groundwork for the postponement, again, of the final leg of the consumption tax hike from 8 to 10% beyond its currently scheduled date of April 2017 than they are on monetary policy.

If BOJ officials seem rather relaxed on the policy front, it isn’t because the all clear is about to be rung on the economy, but because the policy stimulus has now basically been handed off by the BOJ over to the Government.

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