JPY: Tapering in disguise - MUFG

Derek Halpenny, European Head of GMR at MUFG, suggests that the shift in BoJ monetary policy from targeting an expansion of the monetary base to targeting a level of yield has been viewed by most market participants as a form of implicit tapering of JGB buying and comments today from Governor Kuroda have certainly reinforced that view.

Key Quotes

“Governor Kuroda stated that JPY 80trn worth of purchases might not be needed in order to control the 10-year yield. He added that buying JPY 60 or JPY 70trn of JGBs would still mean the monetary base would expand. Of course you can’t target both a zero percent 10-year yield and commit to expanding the monetary base by JPY 80trn per year, which is essentially the current stance of the BoJ. In reality, asset purchases will decline if financial market conditions allow. But we remain sceptical of the BoJ’s ability to “control” yields. If global deflationary pressures intensify, yields will fall and the BoJ will have to cut the target. If global inflationary pressures rise, the BoJ would at some point have to raise the target rate.

The best scenario for Japan of course would be a rise in global inflationary pressures that forces the BoJ to actively buy JGB to cap yields. That might then result in some form of revival in ‘Abenomics’ and yen selling. In fact, equity inflows from abroad have recently turned favourable suggesting some improved sentiment amongst foreign investors.

Fiscal year-to-date, foreign investors have sold just over JPY 1trn worth of Japanese equities – but most recently there has been three consecutive weeks of buying by foreign investors for the first time since April. If this improved sentiment can be maintained it might signal another leg higher for USD/JPY over the coming weeks.”