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The Bank of Japan delivered its Statement on Monetary Policy and made policy changes as rumored, changing the long term yield target, flexible guidance and is maintaing low rates for 'a very long period of time' with the aim of a sustainable stimulus


BOJ kuroda

On Tuesday July 31 The Bank of Japan Issued It's Statement on Monetary Policy

The BOJ Will also give its Outlook for Economic Activity and Prices 

Headlines via Reuters:

  • BOJ MAINTAINS LONG-TERM YIELD TARGET AROUND ZERO PCT, MAKES ITS POLICY FRAMEWORK MORE FLEXIBLE
  • BOJ MAINTAINS SHORT-TERM INTEREST RATE TARGET AT -0.1 PCT
  • BOJ CHANGES PLEDGE ON LONG-TERM YIELD TARGET
  • BOJ: ADOPTS FORWARD GUIDANCE ON POLICY RATES BOJ: WILL MAINTAIN VERY LOW RATE LEVELS FOR EXTENDED PERIOD OF TIME
  • BOJ: LONG-TERM RATES MAY MOVE UPWARDS AND DOWNWARDS TO SOME EXTENT DEPENDING ON ECON, PRICE DEVELOPMENTS
  • BOJ: WILL CONDUCT JGB BUYING IN FLEXIBLE MANNER SO OUTSTANDING AMOUNT WILL INCREASE AT ANNUAL PACE OF AROUND 80 TRLN YEN
  • BOJ: WILL MAINTAIN VERY LOW RATE LEVELS TAKING INTO ACCOUNT ECONOMIC, PRICE UNCERTAINTIES INCLUDING NEXT YEAR'S SALES TAX HIKE

The Yen weakened from atound 111.00 to 111.50 against the US Dollar on the headlines.

The statement added that the ETF, REIT buying amount may fluctuate depending on market conditions and the BOJ decided to take steps to decrease balance of reserves for which negative rates are applied

The remour was about sustainable stimulus and here it is, 'BOJ decided to adopt forward guidance for policy rates to enhance sustainability of its policy framework'.  Forward guidance is aimed at conducting market opearations, asset-buying in more flexible manner

The Bank said these steps will help hit price target at the earliest possible time while securing econonomic, financial condition stability Will examine risks considered most relevant to conduct of monetary policy, make policy adjustments as appropriate

Board members Harada, Kataoka opposed the decision on yield curve control with the decision on asset buying made by unanimous vote

Bank of Japan Governor Kuroda Conference: Headlines

  • Strengthened commitment to price target with forward guidance
  • To allow bond yields to move in double the range of +0.1% and -0.1%
  • Board member Kataoka opposed outlook report saying prices not rising toward 2%
  • Will adjust policy as needed to keep momentum toward 2% target
  • Expect factors that delayed increase in inflation to dissipate in future
  • Momentum toward 2% inflation is firmly in place
  • See no need for additional easing for now
  • Forward guidance means to keep rates extremely low for extended period of time
  • Allowing bond yields to move more flexibly, doesn't mean we intend to raise interest rates.
  • We have no specific timeline for hitting 2% target
  • JGB market function will improve by allowing more flexible yield moves
  • Increased purchases of topix linked ETFs because they more broadly cover market
  • Today's decision in aimed at making QQE more sustainable
  • Possible for ETF purchases to fluctuate around 6 trillion JPY
  • Forward guidance refutes speculation that the BoJ is heading for the exit or raising rates
  • See no big problems with financial intermediation
  • There is risk of financial intermediation stagnating in the future
  • No plans to continue widening JGB 10-year yield range

This story was updated After the BOJ meeting

BOJ Meeting Preview

The Bank of Japan concluded its regular policy meeting Tuesday It has been rumored all month that the policy-board members may consider ways of giving more flexibility to the BOJ’s policy of fixing the yield on the 10-year government bond at zero. 

The changes will be dependant on new inflation forecasts from policy board members sources say. It is no secret policymakers are already debating changes to Governor Haruhiko Kuroda’s massive easing program, which for all their sheer size has failed to to bring decisive shifts from a deflationary trend. While the Japanese economy today has changed considerably since BOJ Governor Mr. Kuroda took over  in 2013 with his central role in Prime Minister Shinzo Abe’s revival plan the QE experiment has failed to ignite Japan. To be fair though growth has continued for the past eight quarters, the longest streak in 28 years; the Nikkei Stock Average has risen more than 70% during his term; and, the job market is tight.

Inflation is rising gradually toward the Bank of Japan's 2% target, credited to the BOJ’s core policy of keeping interest rates low and even negative while flooding the banking system with cash by buying government bonds and stocks. The reality is the sheer flood of money and credit has not got the results hoped for though a new batch of analysts have short memories so it appears otherwise. Should the next inflation report fail again many BOJ officials are wary of again ramping up stimulus and have publicly warned of the rising cost of prolonged easing. The most evident is the strain on bank profits.

Profits at Japan’s roughly 100 regional banks are being squeezed by the BOJ’s ultra-loose policy. More than half the regional banks lost money on their core lending and fees businesses in the year to March 2017. Concerns have also grown over the BOJ’s commitment to buy 6 trillion yen ($54 billion) worth of ETFs per year, which has reduced floating shares in the market and put the bank on track to become a top shareholder of big Japanese companies. Reuters said

With all that Koruda has yet to achieve the one goal he advertised most loudly at the start of his term: 2% inflation. Core inflation is still less than 1%. Mr. Kuroda has repeatedly told Parliament, using the same language, that he will “persistently continue current powerful monetary easing.”

What the BOJ comes up with investors will be watching. The BOJ may discuss tweaking how  it buys JGBs and ETFs to mitigate market distortions with sources saying any change would be signalled as a step for policy sustainability, not tightening.  The aim is to make massive stimulus program more sustainable. Sounds like nothing new but perhaps a sign the bankers are worried about other factors too such as the trade war instiagted by the U.S. 

The Federal Reserve has been raising rates since December 2015, and the European Central Bank has cut back its government-bond buying. This week,we saw Japanese companies raise overall wages by about 3% in line with a request by Mr. Abe. Though like everything in Japan the figures aren't what they seem. The raises were inflated by temporary bonuses and regular seniority pay increases.

SMBC Nikko Securities chief economist Yoshimasa Maruyama in a note back in March estimated the gains in base pay would remain about 0.9%. Inflation excluding fresh food and energy prices “is unlikely to rise stably above 1% when base salaries rise less than 1%,” said Mr. Maruyama. “It will likely make it difficult for the BOJ to conclude that price growth is moving smoothly toward its 2% goal.”

From The Traders Community News Desk

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