BoJ Review: BoJ disappoints but keeps door open for more easing

• The Bank of Japan (BoJ) is increasing its purchases of ETFs but has kept the policy interest rate and bond purchase programme unchanged at -0.1% and JPY80trn, respectively. The BoJ is keeping the door open for additional easing in September as it awaits the government's fiscal easing package.

• We do not see today's lack of action as a token that the BoJ is done but given that the BoJ refrained from cutting interest rates further into negative territory, we no longer expect it to cut interest rates further.

• Overall, the announcement is a disappointment and the BoJ's decision is negative for risk and global bond markets. However, the market reaction has been relatively modest given the significant disappointment: USD/JPY dropped 2.5 figures and initially dipped below 103. Markets are still speculating on a large fiscal stimulus package, which is likely to be announced next week.

• We expect USD/JPY to remain heavy in coming weeks, targeting 100 in 1M. Longer term, the outlook for USD/JPY very much depends on the size of the fiscal package and the BoJ's subsequent policy response at the next MPM on 21 September. We are currently reviewing our 3-12M USD/JPY forecast but in general we see less upside potential in the cross, as we no longer expect further negative interest rates.

Bank of Japan eases but disappoints

The BoJ this morning announced additional monetary easing measures. It announced that it will increase its purchases of ETFs (exchange-traded funds) to an annual pace of JPY6trn (previous pace of JPY3.3trn). At the same time, the BoJ decided to keep its policy interest rate and bond purchase programme unchanged at -0.1% and JPY80trn, respectively.

In addition to the increase in ETF purchases, the BoJ also decided to increase the size of the Bank's USD lending programme under which the Bank provides USD funding for a period of up to four years to support Japanese firms overseas activities through financial institutions.

Overall, the announcement is a disappointment as we and most other analysts had expected the BoJ to take bolder measures this time and the market was also priced for more easing.

However, in the statement, the BoJ said that it will conduct a comprehensive assessment of the developments in economic activity and prices under ‘QQE' and ‘QQE with negative interest rates' at the next monetary policy meeting (21 September). This could imply that that the BoJ will look to overhaul its QQE programme at the next meeting. At this point in time, the government's fiscal package is likely to have been announced and passed in the Diet.

Given that the BoJ refrained from cutting interest rates further into negative territory today signals that the bar is high for additional rate cuts, in our view. Like the ECB, the BoJ may have second thoughts on negative rates and we no longer expect it to cut interest rates further. However, the BoJ may be looking for other ways to push up inflation and we do not see today's lack of action as a token that the BoJ is done. We believe it is awaiting the government's fiscal stimulus package before it wants to take further easing measures. Hence, we believe the door is open for more stimulus but the lower bound has been reached in terms of rate cuts.

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