Japan: The Looming Game Changer

Published on July 29, 2016

Key Takeaways:

The BoJ has stayed its hand on more extensive easing measures, but it looks to be adopting a “Government first, BOJ second” policy sequence.

The real policy game changer in Japan is likely to be on the fiscal side.

July 29, 2016

The Bank of Japan announced today it will increase the level of annual equity ETF purchases from 3.3 trillion yen to 6.0 trillion yen.

In and of itself, the size of the bump was a positive surprise to the markets. But of course other than that, the BOJ has stayed its hand in adopting any additional easing measures (they will support dollar funding by banks and corporations, though).

While we had thought the BOJ could also step up its increase of JGB purchases, as we had written this was nevertheless a BOJ that was indeed hesitant to cut negative rates deeper than it has, despite overwhelming market speculation to the contrary. And so we, for one, had not been expecting a cut in rates (SGH 7/11/16, “Japan: Stimulus Measures after Victory”).

The news has pushed the yen up sharply, especially with some disappointment that there was no “like helicopter money,” but the Japanese stock price index – and global markets – have stayed firm, supported by the news of the increase in purchasing ETFs.

But perhaps far more important than that is the announcement that the BOJ will conduct a review of QQE with negative interest rates at its next monetary policy meeting (on September 20 and 21).

That review will come after the announcement of details of the fiscal policy stimulus package now expected on August 2, which by all measures will be far more critical in jump-starting the Japanese economy again than any symbolic tweaks on monetary policy and to QQE by the BOJ. And on that front, the government package keeps growing to impressive levels.

Indeed, the stimulus package is leaked at over 28 trillion yen now on a multi-year basis, and most importantly, from what we understand approaching over 7 trillion yen on a “clear water” spending basis, even as the parlor game from the cheap seats continues to be a knee jerk “analysis” of how disappointing the numbers in reality are once the onion is peeled.

Well, that onion keeps getting bigger and bigger.

So there will be speculation now that the BOJ may yet show, at its September meeting, a kind of coordination with the Government that may take the form of a “government first, BOJ second” policy sequence.

Even if not, the real game changer is, and will continue to be, on the fiscal side.

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