Comprehensive easing seems unlikely at BoJ’s policy decision

Comprehensive policy easing seems unlikely at the Bank of Japan’s (BoJ) monetary policy decision scheduled to be held on Sep 20-21, given that Japan’s growth outlook has improved slightly following the upward revision in 2Q16 gross domestic product  and the better-than-expected consumption and investment data at the start of the third quarter.

To improve the flexibility and sustainability of the current policy framework, the BoJ may delete the timeline for achieving the 2 percent inflation target, and revise the composition of the QQE program (e.g., trimming the long-term JGB purchases, increasing the buying of short- to medium-term JGBs, corporate bonds and other risky assets).

Alternatively, the central bank may also delete the inflation timeline, and increase the flexibility of the QQE (e.g., changing the annual pace of asset purchases to a range like JPY 70-90trn, removing the guidance on the average maturity of JGB purchases), DBS reported.

Regarding the controversial negative rate policy, the BoJ is expected to take a careful approach, striking a balance between the benefits and risks. Cutting the interest rates on banks’ excess reserves by a modest 10 basis points cannot be fully ruled out. But this should be accompanied by compensating measures, e.g., negative lending rates, a guidance on the lower bound of negative rates, the report added.

However, impact on the yen would be mixed. A rate cut would weaken the yen. But the outcome also depends on the Federal Reserve’s policy decisions this week, movement of the US dollar and development in global risk appetite.

Meanwhile, the direction of the yen will affect that of equity prices. Banks’ share prices would react negatively if the BoJ further cut rates. But a steeper yield curve could be viewed positively for banks’ earnings.