Interpreting The BoJ's Latest Statement

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Summary

At this July’s meeting, the BOJ announced additions to its monetary easing but fell short of consensus expectations.

The BOJ will make a “comprehensive assessment” of developments in economic activity and prices and the effects of the current policy framework.

Expect more easing in September but those expecting helicopter drops will be disappointed.

At this July's meeting, the BOJ announced additions to its monetary easing: 1) increased ETF purchases to JPY6trn; and 2) measures to ensure smooth fun ding in foreign currencies by expanding the lending program to support growth in USD. The policy package does not include other major policy tools (rate cuts for example), which fell short of consensus expectations. Disappointing? Perhaps, but then the BoJ has had a long track record of missing expectations.

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Following this meeting, the BOJ will make a "comprehensive assessment" of developments in economic activity and prices and the effects of the current policy framework. The next BOJ meeting on 21 September will therefore, be more important now as all eyes will be on whether the BoJ takes on further easing or if its limits have truly been reached. In the meantime, the BoJ downgraded its near-term growth and inflation forecast in the outlook report, but kept its medium-term inflation forecast unchanged

"The Bank will conduct a comprehensive assessment of the developments in economic activity and prices under' QQE' and' QQE with a Negative Interest Rate as well as these policy effects at the next MPM."

The BoJ's reference to the next MPM will generate major speculation as to the Japan's monetary policy direction. The statement at the minimum provides some forward guidance to the market though where the BoJ is trying to guide is unclear. Markets will be split in their interpretations of the phrase "comprehensive assessment" between 1) a signal that further monetary easing could be forthcoming in September or 2) an overhaul of the current monetary policy framework.

The latter scenario, while drastic may just be on the cards as skepticism around the BoJ's ability to ease further intensifies. The BoJ's latest assessment seems excessive and should not have been needed if it was confident in hitting its 2% inflation target. If helicopter money is on the cards, the comprehensive assessment will serve as the first step in considering a new framework with further collaboration between the government and BoJ, and ultimately the introduction of helicopter money. Alternatively, the BOJ can cut the policy rate while shifting to a more flexible target range for JGB purchases with a view to making them more sustainable. NIRP however, remains controversial due to its side effects (particularly on the banks) and doubts remain as to whether the BoJ has reached the limit on JGB purchases.

From the perspective of communication strategy, the BoJ's latest round of forward guidance serves to: 1) communicate with the market in advance to reduce unnecessary volatility and 2) buy time, support market sentiment, and cap equity sell offs or a knee jerk rally in the yen. Forward guidance is becoming an increasingly crucial component of BoJ policy in the backdrop of fading market confidence on the sustainability of the current QQE and negative interest rate policy framework and is therefore something to keep an even keener eye on going forward.

"Comparing the current projections with the previous ones, the projected growth rates are higher, particularly for the first half of the projection period, due in part to the effects of economic stimulus measures from the fiscal side."

This quote suggests the BOJ is expecting considerable positive economic traction from the upcoming government supplementary budget package to occur through FY3/18. This, along with the BOJ statement that "the Bank believes that these monetary policy measures and the government's initiatives will produce synergy effects on the economy" could be a key early indicator of further coordinated easing at the next meeting. Furthermore, Finance Minister Aso has also said he welcomed the BOJ decision to ease policy and the government will continue to work with the BOJ to defeat deflation. These comments remain a long way away from suggesting helicopter money-type policy but they could sustain market expectations on coordinated efforts going forward.

The September meeting (Sep 20-21) is therefore likely to be a highly volatile event. Expect more easing but those expecting helicopter drops will be disappointed.

A full breakdown of changes to the monetary policy statement at July's meeting are as follows:

June

July

(1) Quantity Dimension: The guideline for money market operations. The Bank decided, by an 8-1 majority vote, to set the following guideline for money market operations for the intermeeting period:[Note 1]. The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen.

(2) Quality Dimension: The guidelines for asset purchases. With regard to the asset purchases, the Bank decided, by an 8-1 majority vote, to set the following guidelines:

a) The Bank will purchase Japanese government bonds (NYSEARCA:JGBS) so that their amount outstanding will increase at an annual pace of about 80 trillion yen. With a view to encouraging a decline in interest rates across the entire yield curve, the Bank will conduct purchases in a flexible manner in accordance with financial market conditions. The average remaining maturity of the Bank's JGB purchases will be about 7-12 years.

b) The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 3.3 trillion yen1 and about 90 billion yen, respectively.

c) As for CP and corporate bonds, the Bank will maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen, respectively.

(3) Interest-Rate Dimension: The policy rate The Bank decided, by a 7-2 majority vote, to continue applying a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.

1. Against the backdrop of the United Kingdom's vote to leave the European Union and the slowdown in emerging economies, uncertainties surrounding overseas economies have increased and volatile developments have continued in the global financial markets. In order to prevent these uncertainties from leading to a deterioration in business confidence and consumer sentiment as well as to ensure smooth funding in foreign currencies by Japanese firms and financial institutions, thereby supporting their proactive economic activities, at the Monetary Policy Meeting (MPM) held today, the Policy Board of the Bank of Japan decided upon the following.

(1) An increase in purchases of exchange-traded funds (ETFs) by a 7-2 majority vote[Note 1] The Bank will purchase ETFs so that their amount outstanding will increase at an annual pace of about 6 trillion yen1 (almost double the previous pace of about 3.3 trillion yen).

(2) Measures to ensure smooth funding in foreign currencies by Japanese firms and financial institutions by a unanimous vote

a) Increasing the size of the Bank's lending program to support growth in U.S. dollars The Bank will increase the size of its lending program to support growth in U.S. dollars (the Special Rules for the U.S. Dollar Lending Arrangement to Enhance the Fund-Provisioning Measure to Support Strengthening the Foundations for Economic Growth Conducted through the Loan Support Program) to 24 billion USD (about 2.5 trillion yen; double the previous size of 12 billion USD). Under this lending program, the Bank provides its U.S. dollar funds for a period of up to 4 years to support Japanese firms' overseas activities through financial institutions.

b) Establishing a new facility for lending securities to be pledged as collateral for the U.S. Dollar Funds-Supplying Operations The Bank will establish a new facility in which it lends Japanese government securities (JGSs) to financial institutions against their current account balances with the Bank so that these JGSs can be pledged as collateral for the U.S. Dollar Funds-Supplying Operations.

2. Japan's economy has continued its moderate recovery trend, although exports and production have been sluggish due mainly to the effects of the slowdown in emerging economies. Overseas economies have continued to grow at a moderate pace, but the pace of growth has somewhat decelerated mainly in emerging economies. In this situation, the pick-up in exports has paused. On the domestic demand side, business fixed investment has been on a moderate increasing trend as corporate profits have been at high levels. Against the background of steady improvement in the employment and income situation, private consumption has been resilient, although relatively weak developments have been seen in some indicators. Housing investment has resumed its pick-up, and the pace of decline in public investment has been slowing. Reflecting these developments in demand both at home and abroad and the effects of the Kumamoto Earthquake, industrial production has continued to be more or less flat. Financial conditions are highly accommodative. On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) is about 0 percent. Although inflation expectations appear to be rising on the whole from a somewhat longer-term perspective, they have recently weakened.

2. With regard to the guideline for money market operations, the guidelines for asset purchases except for ETF purchases, and the policy rate, the Bank decided to leave these unchanged.

(1) Quantity Dimension: The guideline for money market operations

The Bank decided, by an 8-1 majority vote, to set the following guideline for money market operations for the intermeeting period:

The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen.

(2) Quality Dimension: The guidelines for asset purchases

With regard to the asset purchases, the Bank decided, by an 8-1 majority vote, to set the following guidelines:

a) The Bank will purchase Japanese government bonds so that their amount outstanding will increase at an annual pace of about 80 trillion yen. With a view to encouraging a decline in interest rates across the entire yield curve, the Bank will conduct purchases in a flexible manner in accordance with financial market conditions. The average remaining maturity of the Bank's JGB purchases will be about 7-12 years.

b) The Bank will purchase Japan real estate investment trusts (J-REITs) so that their amount outstanding will increase at an annual pace of about 90 billion yen.

c) As for CP and corporate bonds, the Bank will maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen, respectively.

(3) Interest-Rate Dimension: The policy rate

The Bank decided, by a 7-2 majority vote, to continue applying a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.

3. With regard to the outlook, although sluggishness is expected to remain in exports and production for the time being, domestic demand is likely to follow an uptrend, with a virtuous cycle from income to spending being maintained in both the household and corporate sectors, and exports are expected to increase moderately on the back of emerging economies moving out of their deceleration phase. Thus, Japan's economy is likely to be on a moderate expanding trend. The year-on-year rate of change in the CPI is likely to be slightly negative or about 0 percent for the time being, due to the effects of the decline in energy prices, and, as the underlying trend in inflation steadily rises, accelerate toward 2 percent.

3. The Government is undertaking fiscal and structural policy initiatives, including a large-scale "stimulus package," which is currently being compiled. The Bank will pursue "Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate" including measures decided today and provide highly accommodative financial conditions. The Bank believes that these monetary policy measures and the Government's initiatives will produce synergy effects on the economy.

4. Risks to the outlook include uncertainties surrounding emerging and commodity exporting economies, particularly China, developments in the U.S. economy and the influences of its monetary policy response to them on the global financial markets, prospects regarding the European debt problem and the momentum of economic activity and prices in Europe, and geopolitical risks. Against this backdrop, global financial markets have remained volatile. Therefore, due attention still needs to be paid to the risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mindset might be delayed and that the underlying trend in inflation might be negatively affected.

4. The Bank will continue with "QQE with a Negative Interest Rate," aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will examine risks to economic activity and prices, and take additional easing measures in terms of three dimensions -- quantity, quality, and the interest rate -- if it is judged necessary for achieving the price stability target.

5. The Bank will continue with "Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate," aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will examine risks to economic activity and prices, and take additional easing measures in terms of three dimensions -- quantity, quality, and the interest rate - if it is judged necessary for achieving the price stability target.

5. As shown in the July 2016 Outlook for Economic Activity and Prices (Outlook Report) released today, there is considerable uncertainty over the outlook for prices against the background of uncertainties surrounding overseas economies and global financial markets. Against this backdrop, with a view to achieving the price stability target of 2 percent at the earliest possible time, the Bank will conduct a comprehensive assessment of the developments in economic activity and prices under "QQE" and "QQE with a Negative Interest Rate" as well as these policy effects at the next MPM. The Chairman instructed the staff to prepare for deliberations at the next meeting.

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