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. | |
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