BOJ could change the target rate of the 10-year JGB

"The Bank of Japan's extraordinary monetary policy has evolved under Governor Kuroda. The shift to yield curve targeting from an aggressive quantitative easing requires the purchase of few government bonds to achieve the goal," BBH economists explain.

Key quotes

Consequently, the BOJ bought fewer bonds than the JPY80 trillion signaled. The BOJ does not know how much buying will be required, nor is it committed to replacing maturing issues like other central banks, including the Fed, ECB, and BOE. The BOJ balance sheet did shrink slightly in December.

It was a bit of a quirk. The BOJ it is not content with the progress on inflation. Officials have been explicit that they will continue to pursue an aggressive monetary policy to achieve the inflation target. While the BOJ slightly trimmed the amount of bonds with long maturities that it was buying, it has not changed the purchases of short- and medium-term securities, or the others assets that it buys, including ETFs, J-REITs, and bank loans.

Even if many observers were confused by the BOJ's operation, it was a good reminder to investors and policymakers alike about the sensitivity to a perceived change in policy. It may show the limits of forward guidance, with the BOJ saying this is not a change in policy and some investors saying "yes, it is." This also underscores our discomfort with the concept of quantitative tightening. The Fed has been seemingly clear on this point. Reducing the balance sheet is not about monetary policy, even if the expansion of the balance sheet was. The primary tool for monetary policy is the Fed funds target range.

The next step in the evolution of the BOJ's policy may be a change in the target of the 10-year JGB. Now it stands at +/- 10 basis points on either side of zero. If the synchronized global upturn continues to spill-over and supports the Japanese economy, BOJ officials prepared to lift the target. The timing though may be involved the appointment of the new BOJ Governor. Kuroda's term ends in early April.

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