Robert Rennie, Research Analyst at Westpac, suggests that with the BoJ comprehensive review of monetary policy less than 4 weeks away, financial markets are starting to speculate what the outcome might be.
Key Quotes
“To be sure, there are multiple unknowns. However, let’s start with the assumption that Abe advisor Honda is correct and that there is “more than 50% possibility” of the BoJ taking bold easing measures.
If that is the case, what would such an outcome look like? Is it possible for the BoJ to ‘boldly’ increase JGB purchases? Having peaked at close to 20% in 2012, JGB holdings as a percentage of domestically licensed banks assets dropped below 9% in May of this year.
An IMF paper published in August 2015 suggested the minimum amount to satisfy repo and derivative markets was 5% of total assets. This suggests that banks are close to the point that they cannot sell many more JGBs. Indeed, for no change elsewhere, we estimate that just a ¥37tn drop in domestically licensed bank JGB holdings would be enough to hit that limit. While other parts of the financial system still hold higher levels of JGBs as a percent of total assets, the BoJ’s challenge will be to execute ‘bold easing’ without stressing the banks.”
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