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Bank Of Japan Leaves Policy Unchanged As Expected - Admits Defeat On Deflation

Japan's long and sordid dance with unconventional monetary policy continues. With most analysts expecting a 'nothingburger' from Kuroda (though some hinting at the potential for shock-and-awe), The BOJ delivered... nothing - no change. However, most critically, the BOJ admitted defeat of deflation and delayed the timing of reaching their 2% inflation goal to around FY2019.

No change to policy:

  • BOJ Maintains 10-Year JGB Yield Target at About 0.000%
  • BOJ Maintains Policy Balance Rate at -0.100%
  • 80 trillion yen target purchasing remains in place

But...

BOJ Raises Assessment of Economy - FY2017 GDP forecast is 1.8%, FY2018 GDP Forecast Is 1.4%, FY2019 GDP Forecast Is 0.7% - But sees risk skewed to the downside.

Growth to Continue Above Potential Through Fiscal 18

 

Japan Economy Likely to Continue Moderate Expansion

 

Risk to Economy, Prices Skewed to Downside

BOJ Delays Timing of Reaching 2% Goal to Around FY2019 - BOJ FY2018 Core CPI Forecast Is 1.5%

"Around FY 2019" means in the year ending March, 2020. So the board probably won't have to revisit this issue for quite some time.

 

Price Momentum Not Yet Sufficiently Firm

 

Inflation Expectations Remain in Weakening Phase

As Bloomberg's Chief Asia Economics Correspondent noted, the statement reads very dovish to me. An impartial observer landing from Mars could only conclude the BOJ's massive stimulus has a long way to go yet.

 

The BOJ's distorting effect in the stock market is in focus today, after Bloomberg scoops on concerns among BOJ officials and the head of Japan's stock exchange with the scale of ETF purchases.

While policy is held unchanged, The Bank of Japan has tapered its purchases without spooking investors into thinking its scaling back stimulus - by switching to the yield-curve target as its priority.

But with ETFs, there's no obvious bait-and-switch option to change the focus from what's now solely a quantitative target. It's very hard to see the BOJ adopting, for example, a stock-price target in the way that it now targets yields.

Equity markets were, of course, unphased by the BoJ meeting with volatility at 12-year lows:

 

Finally, Bloomberg Intelligence economist Yuki Masujima warned that a big risk ahead for BOJ after two board members leave this week is tunnel vision. Takahide Kiuchi and Takehiro Sato routinely challenged the policy board's consensus, and their successors are less likely to oppose Kuroda.

"The BOJ may start to suffer from a worse case of groupthink at the very time a diverse set of opinions will be needed to inform policy."

As a reminder, Takenobu Nakashima, quantitative strategist at Nomura Securities in Tokyo, warned "core-core CPI is also hovering near zero so the BOJ can't reduce bond buying or raise zero percent target for 10-year yield."

Reaction from Stephen Innes, a Singapore-based senior trader at foreign exchange company Oanda:

"I suspect other central banks are quite happy for the BOJ to refrain from a policy shift at this time given such an outcome could spark a global bond market mini-tantrum."

 

"Mixed reaction as the market on sidelines awaiting the follow-up presser."

 

"Kuroda is likely to be bombarded again with questions about the bank’s exit policy at his post-meeting press conference. Whether we hear a case of central bank verbal gymnastics to avoid the problem or he provides some guidance, the reality is the low level of inflation makes it highly unlikely he will stir the pot publicly even if such discussions are going on behind closed doors."

Social media is not impressed...

When BOJ gets 2% inflation& avg interest=3%, interest alone will=28% of the budget. It'll print like crazy to (failingly) try lowering that! https://t.co/MbkvuaXDWx

— Mark B. Spiegel (@markbspiegel)

So BOJ now projects printing ¥80T/yr thru 2020. Then what? Interest alone

% rate now=9.4% of budget. What happens when it's 3%?!

— Mark B. Spiegel (@markbspiegel)

The world's best "desert island trade" (set it and forget it for the next 5 years) is shorting yen. Good night, Japan, and good luck. https://t.co/sYCuD7zMsM

— Mark B. Spiegel (@markbspiegel)