In the end, BOJ governor Haruhiko Kuroda tried his best to pull off a Mario Draghi – introducing a tightening event while smothering it in “easy” forward guidance – and failed.
While Kuroda was not faced with anything nearly as dramatic as announcing the end of QE as Draghi did last month, the BOJ head still tried having his monetary easing cake while somehow modestly steepening yield curves to give Japanese banks a little extra support now that the BOJ has been forced to admit that its inflation targeting timeframe has been a disaster, and QE will continue indefinitely, or at least until it runs out of bonds to buy. For now, it is unclear if he will succeed, especially since the market’s reaction was not what Kuroda had expected, and for good reason: the “market” knows well that even the smallest gambit to reverse policy would blow up in Kuroda’s face. But that doesn’t mean he won’t try.
As a reminder, here is what happened overnight: as previously leaked to the press, the BOJ took – or at least tried to take – several steps to alleviate the strain on banks and the market distortions stemming from its policy while keeping unchanged its two major benchmarks – negative interest rate and the 10-year yield target of 0%. The central bank added modest flexibility on rates while keeping the 10Y anchored at 10%, it also pulled a page out of the ECB’s playbook and added forward guidance on rates, while making small superficial changes to its ETF buying program.
The initial response was underwhelming, with JGB yields sliding after the announcement was released just minutes after 1pm local time, as the market realized that contrary to the leaks, the BOJ would keep its Yield Curve Control in its current form.
For those who missed what happened overnight, here are the key highlights from the most anticipated BOJ statement in 2 years:
- Negative interest rate of -0.1 percent maintained, but will apply to fewer reserves to cushion the impact on commercial banks
- Target yield for 10-year bonds remains 0%
- The BOJ added language stating that “the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices.”
- Just like the ECB, the BOJ added forward guidance to its policy rates, with a commitment to keep the current extremely low levels for short- and long-term interest rates for an “extended period of time”
- Overall purchases of exchange-traded funds are kept at 6 trillion yen ($54 billion) but those linked to the Topix will increase to 4.2 trillion yen, from 2.7 trillion yen, further reducing the weighting of the narrower Nikkei 225
