Bank of Japan board member Hitoshi Suzuki signaled in interviews that the BOJ may raise interest rates before inflation hits its 2% target. He also said the BOJ could slow or change the way it buys exchange-traded funds (ETF) purchases in the future.
Bank of Japan board member Hitoshi Suzuki signaled in interviews that the BOJ may raise interest rates before inflation hits its 2% target. He also said the BOJ could slow or change the way it buys exchange-traded funds (ETF) purchases in the future.
Image: JGB since 2008-2017 Yeield Curve is all BOJ has left to play with?
BOJ Japnese equity ETF buys have been a major source of the Nikkei Dow surge which in turn has fueled the S&P500 and other indices to record highs. Throw in the cheap money funded by the JGB yields and you ahve potent cocktil for asset price elevation..
Suzuki carried out interviews with the Mainichi and Jiji news agencies. The interviews appear to be taking a clear lead from the U.S. Federal Reserve playbook to hint or fuel rumors to guage market reaction. For the first time we see there is room to debate a fine-tuning of the central bank’s yield curve control (YCC) policy.
“It’s inappropriate for interest rates to show no changes until the 2 percent inflation target is hit, and then jump abruptly once the target is achieved,” Suzuki said in the interview with the Mainichi daily newspaper.
“There is room to debate a fine-tuning of YCC once inflation heads near 2 percent, so that markets can gradually accept the changes,” he said.
It was has concerned most prudent analysts the cheap money has not only created an unrealistic risk profile and by failing to ignite inflation has created asset inflation which further has created unreal expectations. Stock markets, particularly in the US continue to rise in the belief they cannot fall because of Central Bank backstops. Signaling BOJ changes to current policy suggests the central bank is ready to alter the current policy.
Szuki said the BOJ’s negative rate policy is having a “significant” impact on financial institutions’ profits.
“If the health of financial institutions is in trouble, it’s possible monetary policy won’t function well,” Suzuki was quoted as saying.
This has been a major concern particuarly in the US were QE has effectively padded bankers bonuses and asset investments rather than boost the middle economy, what happens should that support go away?
“I‘m carefully watching how our policy of controlling the yield curve affects the economy, and whether or not it is creating any distortions,” Suzuki said.
“The BOJ’s ETF buying is part of its monetary policy framework and must be continued to achieve 2 percent inflation at the earliest date possible,” Suzuki said in an interview with Jiji that also ran on Saturday.
The Image below just how pervasive the BOJ is in the Japanese stockmarket, this is taken from October 2016. The shareholdings are now much larger than projected.
“We won’t make decisions on our ETF buying looking just at the stock market. But changing the amount or method of our purchases is a future option,” he added.
Understanding BOJ policy in this regard last weeks paper by Yukitoshi Funo Member of the BOJ Policy Board is illustrative;
Economic Activity, Prices, and Monetary Policy in Japan
With a view to achieving the price stability target, the Bank introduced Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control in September 2016, and has been implementing powerful monetary easing policy under this framework.
This policy framework consists of two major components.
The first is yield curve control, in which the Bank facilitates the formation of short- and long-term interest rates that are considered most appropriate for maintaining the momentum toward achieving the price stability target, taking account of developments in economic activity and prices as well as financial conditions.
Specifically, at present, according to the guideline for market operations, the Bank sets the short-term policy interest rate at minus 0.1 percent and purchases Japanese government bonds (JGBs) so that 10-year JGB yields will remain at around 0 percent.
The second component is an inflation-overshooting commitment in which the Bank continues with the monetary easing framework, aiming to achieve the price stability target, as long as it is necessary for maintaining that target in a stable manner. On this point, the Bank makes clear that it will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner.
Another aim of the BOJ policy was to weaken the Yen. on Friday the $USDJPY traded at the lower end of 111.00 closing at 111.50. Higher rates would also sure up the yen and risks of carry trade unwinding should rates rise to fast. Much to consider in the manuipulated environment the BOJ has created. The potential of unitended consquences grows as prices rise.
Source:
BOJ Suzuki signals room to fine-tune yield curve control: media
BIS: Economic Activity, Prices, and Monetary Policy in Japan