BOJ monetary policy: Assessing future bias

Bank of Japan (BoJ) braved the market and more specifically Yen’s strength and kept the policy almost unchanged, except for few tweaks n its easing program -

• Bank of Japan shifted the timeline for reaching the 2 percent inflation goal to “earliest possible time” and with that view it introduced QQE with yield curve control. It means that the bank would guide both short term and long term rates while purchasing assets at the pace of ¥80 trillion per annum, until the inflation overshoots the 2 percent target and stays above.
• For short-term rate controls, BoJ will maintain a negative interest rate of -0.1 percent and for the long-term rate control, it would purchase assets in such a manner that the 10-year yield remains around the current level of zero percent.
• BoJ scrapped the maturity target, which was previously 7-12 years.
• In addition to that, BoJ would use fixed rate purchases of JGBs and fixed rate funds supplying for a period up to 10 years.
• The bank will continue to purchase ETFs at ¥6 trillion per annum, CPs at ¥2.2 trillion annually, corporate bonds at ¥3.2 trillion annually, and J-REITs at ¥90 billion per annum.
• While committing the overshooting of the inflation the bank warns that there could be the difference in the pace of purchases and the ratio of the monetary base to nominal GDP to exceed 100 percent in a little more than a year.

The policy actions or tweaks, taken up by the central bank are very ambitious and quite dovish. The real impact would likely to be felt once the yield curve control commence.

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

• Today’s policy doesn’t say much about future, instead, focuses on current monetary policies and to the new measures taken by the central bank. BoJ expects that the overshooting commitment would strengthen the inflation expectations
• BoJ states that the QQE has brought improvements and Japan is no longer in deflation. (Mild Hawkish bias)
• The central bank blames other factors such as lower oil price to be the reason for not achieving the 2 percent target. (Mild Hawkish bias)
• With regard possible future easing option the central bank pointed to interest rates and QQE(Mild dovish bias)
• BoJ is confident that with this new policy tool and appropriate fiscal policy the inflation target would be achieved. (Mild hawkish bias)

The analysis of the monetary policy suggests that the central bank is now hawkish tilted and likely may hold its fire for the medium term. Hence we don’t expect further action for the next three-quarters. The yen has weakened post policy and currently trading at 102.2 per dollar.