Bank of Japan: To keep its powder dry

Susan Joho, economist at Julius Baer, says the Bank of Japan will likely save the little room it still has to cut negative interest rates further for later and only announce smaller changes this week.

This much-awaited Bank of Japan (BoJ) policy meeting could turn out to be much less of a game changer than initially expected. The announcement of a comprehensive assessment to be presented at the coming meeting raised expectations for a change in the monetary framework to a high level.

However, even if the BoJ sells its changes well this Wednesday, they will not be pivotal. First and foremost, the central bank will likely conclude that monetary policy under Governor Kuroda has been largely successful, thus giving the “Quantitative and Qualitative Monetary Easing with a Negative Interest Rate” framework the thumbs up to be continued.

Two limiting factors could be scrapped.

First, the 2-year horizon to attain the 2-percent inflation goal could be re-placed by the phrase “as soon as possible”, giving the Bank of Japan less pressure to add monetary stimulus when nearing the deadline.

Second, the requirement for the average maturity of 7-12 years for Japanese government bond holdings could be re-moved in connection with the BoJ’s desire to steepen the yield curve and alleviate pressure from low yields for pension funds. Moreover, it would give the BoJ more flexibility in a more and more illiquid market due to its own dominance.

What about Kuroda’s hints of cutting negative interest rates further? Given better macroeconomic data, a well-behaved yen above 100 against USD and a Federal Reserve about to turn more hawkish soon, we expect him to keep the little powder he still has left dry this time and to use it only if needed, in order to protect Japanese banks struggling with the negative interest rates.

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