Markets have been jittery ever since the BOJ announced on July 29 that it would conduct a “comprehensive assessment” of its monetary policy in September.
Japan’s benchmark 10-year government bond yield has climbed from around minus 0.3% to nearly 0%. The yen strengthened to the upper 100 range against the dollar Thursday, driven partly by a comment by BOJ Deputy Gov. Kikuo Iwata that diminished expectations for additional easing.
These market movements indicate fear that the BOJ will scale back its 80 trillion yen ($791 billion) per year bond-purchasing program. With the supply of Japanese government bonds running short, some reckon that the BOJ will hit a ceiling in one or two years if it keeps buying at the current pace. Some observers see the assessment as an opportunity for the bank to start to taper purchases.
Even some at the BOJ realize that quantitative easing is running on borrowed time. Deputy Gov. Hiroshi Nakaso said in June that the BOJ “will continue to carefully monitor” the JGB market. Other top BOJ officials are open to a more flexible approach to bond purchasing if long-term interest rates hold steady at low levels.
But if the bank is seen to be letting up, it may invite a stronger yen, a weaker stock market and higher interest rates. Furthermore, it would bring pushback from Iwata and other “reflationists” who place importance on expanding the monetary base.
The nine-member BOJ policy board is split on a number of these decisions, as evidenced by the release of the banks “Summary of Options” this morning, via Forexlive: (my emphasis added)
- One member said need to conduct thorough assessment of policy effect to gauge what is needed to hit 2 pct inflation
- Economy, prices improved markedly in past 3 years but price target yet to be achieved
- Must eliminate view there are limits to monetary easing, or that there are drawbacks to easy policy
- Impact of further declines in long-term interest rates on capex is limited
- Bond market volatility may heighten as market liquidity for long-term JGBs sharply falling
- Must avoid overseas uncertainties from hurting sentiment among companies, households
- Must ease policy now to ensure Japan hits 2 pct inflation during fiscal 2017
- Appropriate to ease policy now as downward pressure on prices from FX to continue, downside risks to inflation is high
- Expanding ETF purchases would be seen as drip-feed step, may expose BOJ to unlimited market hopes for further easing
- Buying 6 trln yen of ETFs each year would be excessive, distort market functions
- Easing policy now would show government, BOJ working together
The Yen sold off briefly on the release of the summary, but its come back already. Confidence is the key to managing a deflationary situation like Japan’s, but I believe that market participants aside, no one really has confidence that central bankers can solve this problem on their own with monetary policy options.