BoJ: Yen weakens modestly in anticipation of easing to come - MUFG
Derek Halpenny, European Head of GMR at MUFG, notes that the USD/JPY has managed to bounce modestly on the BoJ’s decision to announce a shift in stance under the latest title of “New Framework for Strengthening Monetary Easing: Quantitative and Qualitative Monetary Easing with Yield Control”.
Key Quotes
“The shift in monetary policy strategy comes in three forms –
(1) Yield Control. (Majority Vote 7-2). The BoJ will cut the negative rate if necessary but for now continue with the -0.1% interest rate on reserves. The BoJ will also purchase JGBs so that 10-year yields “remain more or less at the current level” but the BoJ also committed to maintaining the annual pace of purchase of JPY 80trn. In theory that could prove difficult to commit to both a yield and an amount purchased. To help in that the BoJ scrapped the guideline for average maturity of BoJ purchases. Outright purchases of JGBs with yields designated by the BoJ will also be used along with extending fixed-rate fund supplying operations from the current 1-year timeframe to 10 years.
(2) Guidelines for Asset Purchases. (Majority Vote 7-2). Other than JGB purchases, the BoJ decided to maintain the ETF and J-REIT annual purchase rate at JPY 6trn and JPY 90bn respectively. Commercial Paper and Corporate Bond purchases were also left unchanged at JPY 2.2trn and JPY 3.2trn respectively. However, rules on the maximum amount of ETFs purchased covering the portion totalling JPY 5.7trn changed and BoJ purchases will now be linked in proportion to the size of the ETF relative to the total market size.
(3) Inflation Overshooting Commitment. The BoJ did not water down its time commitment on achieving the inflation target like some market participants expected. The BoJ now is committing to continuing its policy “until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds the price stability target of 2% and stays above that target in a stable manner”. It could be argued that this addition effectively is a commitment to extend monetary easing for an even longer period of time. The BoJ repeated its objective to achieve its inflation goal “at the earliest possible time”. So there has been no shift away from the inflation goal by the BoJ in any way.
The BoJ also highlighted in a separate paragraph under the title “Possible Options for Additional Easing” that both cuts in the short-term policy interest rate and the target level for long-term yields were possible going forward as was a further expansion of asset purchases.
Our initial take on the announcements from the BoJ is that perhaps the BoJ has just about managed to meet very low, sceptical expectations over what might be announced today. On the plus side, the BoJ has in no way moved away from its commitment to maintain monetary easing and the statement emphasises the importance of momentum in changing the “deflation mindset” in Japan. So market participants are likely to conclude that further easing is probable over the coming policy meetings.
On the negative side, the announcements likely won’t eradicate the scepticism in the market over the BoJ’s ability to achieve its inflation goal through additional easing. The strengthening of the inflation goal by now seeking an overshoot is all well and good, but if there is deep doubt over reaching even 2.0%, there will be even greater doubt over achieving an overshoot.
So there is nothing in today’s announcement to make us turn suddenly yen bearish. The BoJ has done what it could and will no doubt remain under pressure to ease its monetary stance further if they are serious about achieving an inflation overshoot “at the earliest possible time”. If the BoJ has altered its goal on inflation, surely additional monetary action will be required in order to provide credibility to the achievement of that goal. So the potential for action may help limit yen strength but without a shift in market scepticism over lifting inflation expectations, the yen is set to advance further.”