BOJ: Yield curve targeting - BBH

The Bank of Japan’s (BOJ’s) efforts to stimulate inflation shifted from its quantitative and qualitative easing to targeting the ten-year bond yield (+/- 10 bp), points out Marc Chandler, Global Head of Currency Strategy at BBH.

Key Quotes

“It had already set the deposit rate at negative 10 bp. This yield curve management requires the purchase of few government bonds, though it continues to buy other assets including ETFs and corporate bonds.”

“It should not be surprising if BOJ bond buying under the yield curve management strategy falls to JPY30-JPY40 trillion rather than the declaratory policy of JPY80 trillion. Some observers have called this tapering, but that is not the signaling impact. Nor have there been other signs that investors believe the BOJ is reducing its effort to  secure greater price pressures.”

“BOJ Governor Kuroda’s term is up near mid-year. A BOJ governor has not served two terms in modern history. We suspect Mr. Kuroda may be offered a second term. However, even if he is not, we suspect the activist approach to monetary policy will be shared by his successor. Prime Minister Abe has influenced the BOJ the way that President Trump will influence the Federal Reserve: through the power of appointment. The BOJ board is now comprised of men with the same general philosophy as Kuroda (whose name means black) rather than his predecessor Shirakawa (whose name means white).”

“The year-over-year core rate, which excludes fresh food, rose from -0.2% at the end of 2016 to 0.8% in October 2017. While still well shy of the 2% target, there has been some significant progress, and we expect more next year. We expect the spring wage round to agree with something on par with this year’s 2% increase. If the global synchronized recovery continues into 2018, as looks likely, and if global bond yields rise, there is some risk that the BOJ raises its target on 10-year JGBs.”

“Prime Minister Abe is committed to lifting the sales tax in 2019 to 10% from 8%. If the previous hike is any guide, the anticipation of the tax increase may boost consumption late next year. There may be some political pressure to delay it again, but the economy is performing better than it has in years.”