BOJ monetary policy: Assessing future bias

Bank of Japan (BoJ) braved the market and more specifically Yen’s strength and kept the policy unchanged, which basically means the following –

• The bank will keep purchasing the outstanding JGBs at the pace of ¥80 trillion per annum, with a portfolio duration of 7-12 years.
• Will keep purchasing ETFs at ¥3.3 trillion per annum, CPs at ¥2.2 trillion annually, corporate bonds at ¥3.2 trillion annually, and J-REITs at ¥90 billion per annum.
• Policy rate will remain at -0.1 percent.

How is the bank likely to behave in future in terms of policy actions?

• BoJ thinks that Japan's economy has continued its moderate recovery trend, despite sluggish exports and production, thanks to weakness in emerging market. Sluggishness likely to remain in exports and production but domestic demand will improve. Exports will rise slowly as Emerging economies recovering from the bottom. (Neutral bias)
• Foreign economies growing at a moderate pace but weakness in emerging market. This has led to a halt in export growth.(Mild dovish)
• Business fixed investment showing moderate increasing trend thanks to high corporate profits. (Mild hawkish).
• Improvements in employment and income, housing investments pick up, a slowdown in decline in private investment, and private consumption resilient. (Hawkish bias)
• Industrial production flat. (Neutral bias)
• Financial conditions are highly accommodative. (Neutral bias)
• Consumer price index is about 0 percent. Inflation expectations rising longer-term perspective but recently weakened. Inflation likely to remain negative or zero. (Neutral bias)

Bank of Japan lists down the risks ahead –

Almost every aspects covered.

• Uncertainties surrounding emerging and commodity-exporting economies, particularly China.
• Developments in the U.S. economy and the influences of its monetary policy response to the global financial markets.
• European debt problem, economic activity, prices, and geopolitical risks.

Finally, it vows to continue its current easy monetary policy and keep the door open for future actions.

While there is a possibility that the bank may go for additional easing in the case of Brexit leading to financial turmoil and strengthening of Yen but at the same time, statements above suggest it is more likely to sit tight. Hence, further policy actions may come with coordination with global peers.

Yen has strengthened sharply over the policy decision and currently trading at 104.2 per Dollar.