- BoJ is expected to maintain rates at -0.10% and QQE with YCC at its policy announcement on Friday
- Focus will be on the outcome of its policy framework review aimed at sustaining easy policy
- Widening the target yield band, adjusting ETF purchases including target removal and tweaking the three-tier deposit system are among the potential measures officials are said to consider
OVERVIEW
The Bank of Japan will conclude its latest 2-day policy meeting on Friday where the central bank is expected to maintain the bank rate at -0.10% and to continue with QQE with Yield Curve Control to flexibly target 10yr JGB yields at around 0%. However, much of the focus will be on the outcome of the central bank’s March review which is aimed at sustaining easy policy and where officials are said to discuss whether to expand the implicit band for the 10yr JGB yield target which is currently at 40bps or +/- 20bps on either side of the 0% target.
MARCH REVIEW
BoJ announced in December that it will conduct an examination of a more effective and sustainable monetary easing framework to achieve the price goal and will release the outcome of the examination at the March meeting although it noted there is no need to change the YCC framework, while several members thought the BoJ should seek ways to make ETF purchases more flexible as ultra-loose policy is prolonged. There has been plenty of commentary ahead of the review as the Summary of Opinions from the January meeting stated that an essential issue is to enhance the sustainability of daily operations alongside making tools agile to respond to changes in a timely manner and that the BoJ must reconfirm the purpose of the 2% target in the review. Furthermore, it was suggested that making YCC and ETF purchases more flexible was crucial, while there was also the opinion that allowing 10yr JGB yields to move in a wider range around the target will help stabilize the financial system and that the impact on the economy will be limited even if the BoJ allows long-term rates to move more.
GOVERNOR KURODA OPPOSES WIDENING THE YIELD BAND
BoJ Governor Kuroda has weighed in on this in which he stated the March review will include economic analysis on why inflation hasn't picked up and that the BoJ has no intention of pushing up 10yr JGB yields from around zero and is already buying ETFs flexibly which is possible under current guidelines. Kuroda more recently commented that the BoJ will likely debate whether to expand the implicit band for the 10yr JGB yield target but then declared that he doesn’t think it is necessary nor appropriate to widen the band and that it is now the time to keep the yield curve stably low as the pandemic is still impacting the economy. However, Deputy Governor Amamiya pushed back on this and stated that Governor Kuroda was voicing his personal view, while Amamiya affirmed that the review will discuss whether to increase the 10yr JGB target band and suggested they need to alter the perception that they cannot or will not ease further due to policy side-effects.
OTHER SPECULATED MEASURES
Speculation amongst local press has been rife including reports the BoJ may look to clarify that it has room to lower negative rates further, while sources noted the BoJ could tweak its three-tier deposit system to exempt a larger portion of reserves from negative rates and it was also suggested that the BoJ is likely to insert clearer guidance on what it regards as acceptable levels of fluctuations for long-term yields. The BoJ could also consider scaling back ETF purchases or may replace some numerical guidelines for the programme with a pledge to ramp-up buying in volatile conditions and there were even rumours the BoJ is planning to scrap its target of ETF purchases which is currently at JPY 6tln annually with the upper limit of JPY 12tln. However, officials were previously said to be hesitant to scrap the target as it could give the impression of the central bank dialling back stimulus and a recent survey showed that only less than 30% of analysts were forecasting the central bank to either scrap the ETF target or ceiling. Furthermore, sources close to the matter noted the BoJ was mulling releasing analysis of the potential impact if it were to lower rates deeper into negative territory to demonstrate its willingness to do so if required and which would provide a foundation to assess possible action to address the unwanted knock-on effects a rate cut would have especially on the banking sector.
ANNOUNCEMENT
As usual, there is no exact scheduled release time for the BoJ decision which tends to be anytime after the start of the Tokyo lunch break at 02:30GMT/22:30EDT. The potential market reaction to the review is difficult to gauge beforehand as there are a lot of moving parts to consider, although a widening of the implicit 10yr yield band would likely signal the central bank has a greater tolerance for higher yields which could pressure 10yr JGBs, lift yields and underpin banking stocks. An adjustment to the three-tier deposit system to exempt more funds from negative rates would also be welcomed by domestic banks, while participants will be looking out for any tweaks to the BoJ’s current ETF purchases as scaling this back has the potential to trigger a tantrum for stocks.