In a decision that came dramatically late, hitting shortly after midnight east coast time, the Bank of Japan finally unveiled its much anticipated QE revision which it called “QQE with Yield Curve Control”, and which when stripped of all the rhetoric was basically the Reverse Operation Twist we previewed two weeks ago: an attempt to steepen the yield curve without lowering rates further, and without purchasing more securities; in fact the BOJ did largely nothing which is why as the chart below show, the USDJPY is now precisely where it was before the BOJ announcement.
Some more details: as reported last night, the BOJ presented its new and improved monetary policy dubbed “QQE with Yield Curve Control,” (because “QQE infinity” as Goldman Sachs just called it sounds a little aggressive), in which the BOJ said it would buy JGBs such that 10-year yield remain at the current level of around zero percent. The BOJ will also buy JGBs at designated yields, and offer fixed-rate funds-supplying operations for up to 10 years; the BOJ also hopes to exceed its 2% inflation target and may also set lower bound to purchasing yields.
- Central bank left negative interest rate at -0.1% as well as annual pace of JGB purchases at 80t yen
- BOJ commits to expanding monetary base until year-on- year rate of increase in CPI exceeds the 2% target
- Kuroda said after decision that excessive drop in yield curve could harm the economy; says framework change is not tapering and BOJ isn’t reaching limits for bond purchases
Most importantly, however, the BOJ unexpectedly left both the policy rate and its QE unchanged today, with the ongoing policy summarized as follows.
Effectively the BOJ telegraphed a shift in policy framework toward focusing entirely on the yield curve for the foreseeable future. In other words, instead of expanding its QE, the BOJ was forced to defend that its action today was not tantamount to tapering QE, and was instead focused merely on undoing the damage that its January NIRP decision inflicted on banks, insurance companies and the economy.
Well, that’s central banking for you.
To be sure, the BOJ may yet decide to expand JGB purchases or cut the negative rate further as soon as its next meeting ending on Nov. 1. Some economists suggested it should wait until after the Federal Reserve’s rate decision later Wednesday before acting. A Fed rate hike, though deemed unlikely this month, would probably help the BOJ’s cause by weakening the yen versus the dollar.
Meanwhile, inflation indicators and expectations have sagged. Japan’s core consumer prices fell in July at the fastest pace since Kuroda took the helm of the BOJ in March 2013. Market participants this year have shrugged off Kuroda’s repeated vows that he would act whenever necessary, helping drive the yen to long-term highs. It has gained about 18 percent this year.
In any case, in kneejerk reaction, the USD/JPY climbed as much as 1.1% to 102.79 before paring all gains; the yield on the 10-year JGB climbed to as high as 0.005%, before trading at -0.035%.
And that was it in a nutshell.
The Wall Street response was quick, and very disappointed with what the BOJ unveiled. The best response came from Bloomberg’s Mark Cudmore who slammed the BOJ’s “simple act of illusion“as follows:
The Yen Monster Will Rise Again
The BOJ needed to shock and awe, and instead has just performed a simple act of illusion. The bank’s new policies will only create enough noise and distraction to postpone the inevitable conclusion that its actions have been insufficient yet again.
The uninspiring new steps announced today are more like minor rule amendments instead of a switch to a whole new game in the contest versus deflation. Unless the Fed can surprise hawkishly later today, expect the yen to rally again very soon.
Volatility is assured for the rest of the day as the market exchanges interpretations, with the press conference set to add further context and spin.
Yield-curve targeting may weaken the yen in the short-term. But the challenges of implementing such policy, combined with the fact that the BOJ is only aiming to maintain current 10-year yields means that it’s arguably just retaining the recent status quo. It’s gloss that will quickly fade.
Ultimately, it doesn’t really matter how Kuroda justifies these actions. The bank is very far from its inflation target and hasn’t produced an exciting enough new weapon for the fight. Consensus 2016 CPI forecasts for Japan have recently fallen to as low as -0.2% from +0.8% at the beginning of the year. Simultaneously, 2017 consensus has fallen to 0.6% from 2%.
Now over to the Fed decision in New York before a Japanese holiday tomorrow ensures a messy 24 hours of trading beckons
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The rest of Wall Street was not any happier. Here, courtesy of Bloomberg,is a summary of most reactions:
Nomura Securities (Yunosuke Ikeda, head of FX strategy for Japan)
- What BOJ probably wanted to do in comprehensive review is to maintain the capacity for more monetary easing and curb concerns about QE limit
- However, it is possible for USD/JPY to see downward pressure if investors see today’s decision as opening the way for tapering of QE; traders and investors probably want to take profit on USD/JPY positions ahead of FOMC. They may want to sell the pair before touching the upper end of the ichimoku cloud
JPMorgan (Masaaki Kanno, chief economist)
- BOJ unexpectedly left policy rate and QE unchanged today, indicating a shift in policy framework toward focusing more on yield curve in the near term
- Decision suggests BOJ is not so serious about achieving 2% inflation rate so soon and is more worried about the limit of tools and the negative impact of the NIRP
Morgan Stanley (analysts including Hans Redeker)
- USD/JPY is influenced by shape of curve and less by level of yield for now; JPY would weaken only if inflation expectations rise; that could rise via risk- supportive impact from a stronger banking sector that could push USD/JPY to 105 initially
Standard Chartered (economist Betty Rui Wang and macro strategist Mayank Mishra)
- BOJ’s aim of overshooting inflation target suggests monetary easing will last longer than previously expected, while introduction of yield curve control seems an attempt to address concerns about sustainability of asset purchasing policy
- Longer easing is positive for USD/JPY at the margin
BNP Paribas (strategists including Steven Saywell)
- BOJ policy announcement not likely to generate a lot more upside for USD/JPY, unless the Fed raises rates later today
- Expects Fed to raise rates by 25bps today; targets USD/JPY at 108 by year-end
CIBC (Jeremy Stretch, head of FX strategy)
- Additional easing from BOJ, or support from a Fed rate rise, will be required to see substantial USD/JPY upside from here; short-term boost in Japanese stocks provided support for USD/JPY
Mizuho Securities (Hiroko Iwaki, senior foreign bond strategist)
- Long-end Treasury bonds are sold in response to sell-off in similar-maturity debt in Japan after BOJ decision; doesn’t expect bear-steepening of U.S. curve to continue
- Short end of Japan’s curve is firmly anchored, so BOJ- led steepening is unlikely to continue
Norinchukin Research Institute (Takeshi Minami, chief economist)
- First option for the monetary policy seems to have shifted to deepening negative interest rate to steepen the yield curve; today’s decision sets up the environment to do that in the future
- 10-year yield may trade near 0% as the BOJ commits to that line; the central bank probably wants to steepen the curve up to 5-year tenor and therefore, close attention should be paid to repurchase program
- BOJ didn’t add to easing, but delivers framework for further easing, reducing downside risk for USD/JPY
Bank of Tokyo-Mitsubishi UFJ (Minori Uchida, Tokyo-based head of global market research)
- Japanese bank shares, JGB 10-year yield and USD/JPY are rising on waning concerns over side effects of negative rate policy following BOJ’s decision
- Flexible monetary base target may spur speculation of reduced QE; BOJ’s scrapping of target for average maturity of govt bond holdings would shorten average maturity, not add to existing accommodative policy
- Today’s BOJ decision is unlikely to put downward pressure on yen, making it hard for USD/JPY to rise above 103; maintains view that USD/JPY will gradually drop, falling below 100 level toward year-end
RBC Capital Markets (Sue Trinh, head of Asia FX strategy)
- BOJ appears to be laying the groundwork for more easing going forward but wants to take care of the banks first
- From a monetary-policy perspective this is a bit underwhelming as there are no aggressive moves
- Expects USD/JPY to move below 100 in coming weeks, if Fed holds rates unchanged
Nordea (Amy Zhuang, senior analyst)
- BOJ shift in policy framework could be read as sign that it is reaching a limit with easing and isn’t as confident about monetary policy as its policy assessment suggests
- Reluctance to cut rates further may reflect resistance from financial institutions, which have complained about impact of negative rates on earnings and about low long- term yield
Baring Asset Management (Khiem Do)
- It seems there’s domestic political pressure for the BOJ not to hurt banks’ profits anymore
- Don’t know how they’re going to control the yield curve; that’s a very big question mark
Daiwa (Hideyuki Ishiguro)
- BOJ’s policies are a “pass” and may bring the Nikkei Index to 17,000, led by financials
- BOJ hinting it has space for additional easing is overall positive for Japan stocks
Tayo Securities (Ryuta Otsuka)
- Positive for banks, no huge surprise; may get diverse views on direct meddling with the yield curve
- BOJ’s stance that ETF buying won’t get out of control was hinted at in past, which led to some selling in Fast Retailing
Julius Baer (Mark Matthews)
- Japan’s yield curve will be more “artificial” than other countries
- Positive for Japan banks as yen may weaken amid other QE programs and likely rise in Fed’s interest rate at some point
KGI Fraser (Nicholas Teo)
- Knee-jerk reaction to BOJ may reverse depending on Fed
- BOJ didn’t go with full force to easy monetary policy
- Has reserved some bullets for Nov. or Dec. meetings as it waits for Fed decision
Sumitomo Mitsui Trust (Ayako Sera)
- Decision to buy more in Topix is “good news” for the market
- Investors trading arbitrage between Nikkei Index and futures may have harder time
- Topix buying should relieve some of the impact BOJ is having on the market
Saxo Capital (Kay Van-Petersen)
- BOJ decision is indicative of focus on steepening the yield curve; positive for banks and life insurers
- Overall it looks like they’ve done something, but it isn’t a game changer
Jefferies (Sean Darby)
- Disappointing and underwhelming given all the pronouncements and rhetoric
- Board vote was quote poor as well at 7-2
- Equities seeing relief but generally market will take it as monetary tightening because the yield curve has moved up
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So there you have it: key central bank announcement one of two, was largely as we predicted, and worse, judging by both the USDJPY and Nikkei futures, it was also a dud. Furthermore, the BOJ now has to tame the long end of the JGB curve in its attempt to steepen it, something which with hundreds of trillions in yen fighting the BOJ, it may have a tough time doing. In other words, the VaR shock scenario is still in play.
And now we shift our attention to Yellen in 8 hours: she better not disappoint as well.