Morning Commentary: The Bank of Japan: Striving for Sustainability and Effectiveness
A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
The Bank of Japan: Striving for Sustainability and Effectiveness
Share this story:
Andrew Kositkun Senior FX Advisor
The Bank of Japan (BoJ) will wrap up its policy meeting and announce the results of its long-awaited policy assessment this Friday. Markets firmly expect the BoJ to keep its rate target unchanged at -.1% and its 10-year long-rate target unchanged at 0%. As such, focus will be on changes the bank will announce as part of its policy assessment.
Why, then, does the BoJ feel the need to assess its policy? Deputy Governor Masayoshi Amamiya answered this in a recent speech. In essence, the bank wants to create a policy that makes “it appropriate for the bank to maintain accommodative financial conditions while continuing to pursue QQE and yield curve control.” The bank is also looking at ways to enhance the sustainability of its policy by minimizing the policy costs (aka side effects) during normal times while keeping the bank’s response function nimble and effective.
So what should markets expect? A series of trial balloons from “BoJ sources” over the past couple of weeks likely means that specifics are being fine-tuned, but overall, the framework resulting from the review will likely contain the following:
Flexibility of ETF and J-REIT purchases: It is likely that the BoJ changes the language around its program to make buying required only during times of market turmoil.
Fllexibility within the 10-year target band: Early consensus was that the BoJ would widen the trading band around its 0% target to allow for steeping of the yield curve. More recently, however, there has been some pushback on this given the still-elevated uncertainty around COVID-19. As such, it is possible the bank keeps its band unchanged but impose tweaks that would encourage more volatility within the band, as the bank believes this would have a positive effect on the functioning of the bond market without losing the effects of monetary easing.
Tweaks to the three-tier deposit rate scheme: A key goal of the policy assessment is laying the groundwork to deliver additional easing should the economy experience another large shock. Part of this is dialing back asset purchases during periods of market calm, but the BoJ also sees further rate cuts as an important tool. By tweaking the deposit rate scheme to expand the portion of deposits receiving positive yields, the bank can take its policy rate even further negative.
In total, changes at the upcoming policy review are likely to be fairly modest. While there are always risks of a surprise, these risks should be low given our proximity to the sensitive fiscal year-end period (March 31). Moreover, recent market volatility likely makes the BoJ wary of adding to any kind of hawkish narrative. Looking further out, however, it is possible that the BoJ pursues “opportunistic normalization” as it loosens its grip during times of economic and market stability.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Here's what this indicator is saying about US stocks right now. ACTIVE INVESTOR WEEKLY EDITION: January 21, 2022 View in a browser FIDELITY VIEWPOINTS ® WEEKLY EDITION: January 21, 2022 Bollinger band stock signal Here's what this indicator is saying about US stocks right now. Read more CHART OF THE WEEK Inflation and corporate consolidation US industries have become
Learn how to keep all your accounts—not just the ones at Fidelity—secure. November 18, 2021 View in a browser FIDELITY VIEWPOINTS ® WEEKLY EDITION: November 18, 2021 What to do after a data breach Learn how to keep all your accounts—not just the ones at Fidelity—secure. Read more What's ahead for your RMDs Make sure to take your required withdrawals this year, then start to plan ahead.