After much anticipation the Bank of Japan has announced its response to it “comprehensive assessment” of its monetary easing program.
A key findings of the comprehensive assessment was that its Quantitative and Qualitative Easing (QQE) program has worked to a degree but that the 2% inflation target has not been achieved being hampered by the 2014 GST hike, the crash in oil prices and volatile global financial markets.
In response to the assessment the Bank of Japan has announced that it will:
- Seek to target the yield curve (now called “QQE with Yield Curve Control”) aiming to target the 10 year bond yield around zero. To do this it will vary the amount and duration of asset purchases rather than stick to a fixed target. For now it has left its negative deposit rate at -0.1%. The focus on the yield curve was likely partly aimed at alleviating the pressure on banks.
- Introduced a commitment to overshoot on its 2% inflation target, stating that it will continue to expand the monetary base until inflation ex food prices exceeds 2% and stays above it in a stable manner. This is akin to a form of price level targeting as an overshoot is necessary to make up for the undershoot over recent years. In doing this the BoJ is hoping to more forcefully push up inflation expectations after they have recently fallen back.
The BoJ also stressed that it is not out of bullets just yet, stating that it can cut rates further into negative territory, further expand asset purchases and further accelerate the expansion in the monetary base.
Yesterday’s move doesn’t compare to the huge QE and monetary base announcements of a few years ago and I am a bit sceptical that without the adoption of “helicopter money”, ie the direct financing of fiscal stimulus via BoJ easing, the BoJ may continue to struggle to meet its inflation target. Helicopter money would achieve a more guaranteed impact than just bond buying but without ramping up Japan’s already high public debt. However, the BoJ still clearly feels it can do more without that.
Certainly the market response so far to today’s announcement has been positive with Japanese shares up 1.9% with banks and insurers leading the charge higher on the yield curve policy and the Yen down about 0.6% on the prospect on an ongoing increase in the Japanese monetary base.
The positive tone to the BoJ’s announcement today helped push regional share markets, including the Australian share market higher. The downside for Australia is that the prospect of ongoing large monetary stimulus in Japan pushed the $A up by around 0.4% to just below $US0.76. If the Fed delays tonight and sounds dovish then a further gain in the $A is likely.