Bank of Japan holds back on aggressive easing

Today’s announcement fell short of market expectations with many participants expecting something more significant, such as helicopter money, given the continued diminishing inflation expectations and weak growth.

Instead, the central bank kept its monetary policy tools unchanged and kept its annual target for expanding the monetary base at 80 trillion yen by mainly increasing the BOJ’s holdings in government bonds. The -0.1% rate for a portion of commercial banks’ reserves was kept unchanged.

However, the BOJ will enlarge its program of buying exchange traded funds by 2.7 trillion yen ($26 billion) a year. The measure is meant to increase confidence. A dollar-lending facility was also expanded.

The decision from the Japanese central bank led to a higher yen. The Topix index fell, then advanced with a rally in bank stocks. Banks earnings in particular have been suffering from the BOJ’s negative rate policy

What next for the Bank of Japan?

The BOJ also updated its economic projections, stating that there are risks to achieving the 2% inflation target. The decision may be seen as a sign that the central bank has reached the limits of its current policy stance. However, the government is in the process of formulating a major fiscal stimulus program of additional fiscal spending. The details will not be known until the 2 of August. This could be one key reason why the central bank held back on a more aggressive monetary stance with today’s announcement.

We do know that the central bank will again review the effectiveness of its policies at its upcoming meeting on 21 September, due to the uncertainty about the outlook for inflation, which has steadily underperformed the central bank’s target. This may raise hopes for something more meaningful to be implemented later on this year.

At this point, more easing at a later stage this year seems likely, given the central bank has continually fallen short of the 2% inflation target – but we don’t think this this will be the ‘helicopter money’ that many have been suggesting. We know that the central bank has some room to increase ETF purchases further, although we don’t expect the measure to significantly boost inflation expectations and economic growth.

Matthias Hoppe, portfolio manager, Franklin Templeton Solutions

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