von Jesper Koll, Japan Senior Adviser bei WisdomTree.
The Bank of Japan de-facto eased policy at today’s board meeting. They introduced “forward guidance” on top of their long-standing policy of QQE – quantitative and qualitative ease. Essentially this means that the board have now spelled out their commitment to allow a de-synchronization between US rates rising and Japanese rates staying anchored around zero. They also commit to a timeline – rates will stay anchored around zero at the very least until the effects of the consumption tax hike in October next year have fully played out. This suggests early-2020 as the earliest target date for actual rate hikes in Japan.
For markets, this creates a welcome new tension and opportunity: the BoJ is encouraging long-term investors to build-up global carry trade positions, i.e. funding in zero-rate Yen and investing in higher-yielding US fixed income. At the same time, shorter-term speculators are poised to test, from time to time, the BoJ’s resolve. The new result, in our view, should be rising liquidity in both JGB and global markets, as well as a structural depreciation of the Yen against the dollar.
Operationally, the BoJ committed to maintaining its short-term policy rate targeting minus 10bp, and for the 10-year JGB yield it confirms the same target rate as before, “around zero”. In fact, a footnote in the board text spells out that “in case of rapid increases in the yield, the Bank will purchase JGBs rapidly and appropriately.” They also re-confirmed that added JGB purchases will come to around Y80trillion per year.
Meanwhile, the Boj’s equity ETF buying program was also re-confirmed at an annual pace of Y6trillion, although the composition was changed away from the price-weighted NIKKEI225 towards the market cap weighted TOPIX. The change in portfolio composition is a modest positive for Japanese financials and due to their relatively higher weighting in the market cap-weighted TOPIX.
Interestingly, the policy board has revised down its central tendency forecasts for both GDP growth and CPI inflation: board members now expect GDP growth to basically half from 1.5% in FY2018 to 0.8% in FY2019 and FY2020, while CPI inflation is forecast to stay below 2% in both FY2019 and FY2020.