BoJ: Policy flexibility, but reluctance to use it - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that the persistence with the quantitative JGB asset purchase target and lack of action on the interest rate settings suggests a degree of inertia in BoJ policy, fuelling doubts that it is willing to significantly enhance policy easing. 

Key Quotes

“However, the BoJ did say that, “The Bank will cut the interest rates further if judged necessary” (referring to both the cash rate target and the new 10 year yield target).

Now that the BoJ has added yield control, it does appear that it has greater flexibility to cut the short-term rate and adjust its asset purchases to pursue curve steepening with control over long-term yield levels.  But there are lingering doubts over whether the BoJ board will use this flexibility.  It still appears tied to quantity control and reluctant to lower interest rates, limiting the perception that it is will respond decisively by easing policy further if required.

The strength in the JPY appears to reflect these doubts over BoJ willingness to go further and utilize the greater flexibility in its new policy regime.

The BoJ is likely to sit on its latest policy measures and assess the market and economic response over a number of months.  This may tend to perpetuate the rising trend in JPY this year.

The BoJ policy shifts, while relatively subtle at this time, have increased the flexibility and sustainability of its policy.  It has improved the profitability of the financial sector, and it has appeared to reinforce the inflation objective.  Even though the horizon for achieving 2% inflation is now not specified, the BoJ has committed to overshoot.  This may tend to boost confidence and lower real yields in Japan and help stabilize the JPY.  If the JPY were to return to a weaker trend, it would also turn a vicious cycle to a virtuous one that tends to raise confidence and inflation expectations, enhancing the effectiveness of the BoJ’s yield curve control policy.

The fall in USD/JPY since the central bank policy meetings this week has tended to reinforce the down-trend in USD/JPY.  However it has so far stalled for a third time since mid-year at near 100.  As such the USD/JPY continues to trade in a narrowing wedge.  At this stage we are somewhat more optimistic that USD/JPY is coming close to the end of its falling trend this year.”