BoJ: Heading for the exit? - ING

There is increased speculation that BoJ governor Kuroda and his Monetary Policy Committee will start hinting at a possible exit strategy from their Qualitative and Quantitative Easing (QQE) Policy, which combines asset purchases with a zero percent target on 10Y Japanese Government Bonds (JGBS) and negative rates (-0.1%) on excess reserves on bank deposits held with the Bank of Japan, according to analysts at ING.

Key Quotes

“Although there is such merit in this speculation, given the duration and extent of improvements in economic growth, and recent inflation data has been more positive, much of the inflation pick-up is related to energy prices, and as such, almost certainly only a temporary response to crude oil fluctuations. So we don’t think the time is yet right for the BoJ to signal an end to the easing.”

“If we are wrong and they decide to do so, we believe the most sensible course of action would be to simply formalise the undershoot of current asset purchases in a new target. This would send a moderate signal of policy re-alignment, whilst actually changing nothing on the ground. It could therefore be viewed as a dovish normalisation.”

“The other factor to bear in mind is the approach of the April 2019 consumption tax hike. With data running as well as it has, this tax hike has to remain on the cards. If the BoJ waits too long to start moving on its exit plan, it may find its attempt to extricate itself from unnecessary easing clashing with the fluctuations caused by the tax hike.”

“In short, the arguments for some normalising BoJ action are growing, but the story is not there yet. That said, the window for moving will not be wide open forever, and a move later this year, perhaps at the start of the next fiscal year, might be a sensible base forecast.”