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Japan: Upbeat BoJ not yet ready to unwind QE

Wed, Oct 14 2009, 12:35 GMT
by Flemming J. Nielsen

Danske Bank A/S

As expected, the Bank of Japan (BoJ) has left its leading interest rate unchanged, but is more upbeat on the economy. It now believes the economy is recovering and it will probably raise its official forecast for GDP growth at the next monetary meeting.

BoJ did not suggest imminent plans to exit some of its quantitative easing (QE) programmes. The size of QE has been modest in Japan and exit for that reason should be less complex than in the US and Europe and with little market impact.

BoJ now believes the recovery has started

As expected, the Bank of Japan has left its leading O/N target interest rate unchanged at 0.1% in a unanimous decision in connection with today’s monetary meeting. In its statement, BoJ upgraded its view of the economy further and now believes “the economy has started to pick up.” At the previous monetary meeting, BoJ only saw “signs of recovery.” It appears that the economy has started to recover slightly faster than BoJ expected as it has removed “the economy will start recovering from the latter half of fiscal 2009” from its statement. This suggests to us that BoJ is likely to raise its forecast when it publishes its revised GDP forecast in connection with its next monetary meeting on 30 October.

No plans to quit QE yet

There were no comments on whether BoJ plans to start unwinding some of its quantitative easing (QE) measures. There has been speculation in the Japanese press recently that BoJ could soon announce the termination of its programmes to purchase commercial paper and corporate bonds. In the past week, there has been increasing political pressure on BoJ to continue these programmes, not least because the new Japanese government has been discussing plans for a temporary debt moratorium for small businesses to ease financial conditions for small companies. The importance of QE in Japan should not be exaggerated. As seen in the top right chart, the expansion in BoJ’s balance sheet has been modest compared with the Fed, the ECB and the Bank of England. For that reason the exit from QE is likely to be significantly less complex than in the US and Europe. In other words, how and when the Fed unwinds its QE will probably have a bigger impact than how BoJ chooses to unwind its QE.

Some QE programmes are already "living dead"

BoJ’s programme to purchase commercial paper has become virtually irrelevant. BoJ’s total holding of commercial paper has dropped from a peak of JPY1.5trn in March to less than JPY0.2trn. Its purchase of corporate bonds – currently at less than JPY0.3trn – is still far below the JPY1.0trn limit and corporate bond purchases from BoJ have been significantly less than 10% of new issuance according to our estimates. Hence, it is hard to argue that these programmes are important for the financial markets as they are virtually the ‘living dead’. These programmes can easily be ended without disrupting the financial market, although there are no major costs associated with continuing them.

With lots of political attention but little real impact, there is no need to push the issue of the fate of these programmes. With little demand, we see no need to continue them beyond 2009. But whether it does or does not is not something that should keep you awake at night.

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Published on  Wed, Oct 14 2009, 12:37 GMT