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Bank of Japan (BoJ) assures market of its commitment to stimulus

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The Bank of Japan (BoJ) recently expanded its stimulus measures, but the market expected more. Some expect the BoJ to taper these stimulus measures, but bank president Kuroda is essentially signaling that there won't be tapering anytime soon by providing an outline for September's monetary policy meeting. 

(Reuters) The Bank of Japan has already prepared a preliminary outline of a "comprehensive" review of its policies due next month that will maintain a pledge to hit its 2 percent inflation target as soon as possible, sources familiar with its thinking said.

In the draft, the BOJ identifies sharp falls in oil prices, a prolonged hit to growth from a sales tax hike in 2014 and Japan's inability to shake off its deflationary mindset as hampering achievement of its inflation target, the sources said.

By blaming external factors for keeping inflation subdued, the BOJ could use the review to defend its policy framework from rising criticism that three years of heavy money printing had failed to achieve its price target, they added.

"The outcome will probably show that QQE (quantitative and qualitative easing) and an expansion of it in 2014 have been successful," said one of the sources, on condition of anonymity due to the sensitivity of the matter.

The BOJ's announcement last month of the review triggered the worst sell-off in government bonds in more than three years, as some traders speculated that the central bank feared it was being left with a dwindling policy tool kit and so might begin tapering asset purchases.

Other market players bet the assessment could prompt the BOJ to shift to a more radical policy like "helicopter money," under which it monetises government debt by accepting perpetual bonds.

For such investors, an assessment defending the existing policy could be a disappointment, unless it is accompanied by an expansion of QQE or a deepening of negative interest rates.

The preliminary outline appears to make no direct recommendations on the future direction of monetary policy, though the general tone would suggest that a tapering of the BOJ's massive stimulus program is unlikely, the sources said.

Several issues have yet to be finalised due to disagreements in the board, such as whether January's decision to adopt negative rates would help boost inflation, they added.

According to the sources, the review would also look at why negative rates have pushed down yields so much for as long as 20- and 30-year bonds, and how damaging the subsequent flattening of the yield curve could be on financial institutions' profits. (Full article on Reuters)

When the central bank is "super-loose" like the BoJ, the home currency is usually pressured. Following the BoJ's release of its outline, the market is putting some pressure on the Japanese Yen, but it has so far been a snoozer. The USD/JPY fell mainly because the USD was weak. Otherwise, most JPY-crosses were just choppy with a tinge of JPY-weakness.