Research Team at Nomura, notes that the BOJ introduced a new policy framework in its recently concluded meet, "QQE with yield curve control", while it also adjusted its forward guidance.

Key Quotes

“Under the new framework, the BOJ is abandoning the average maturity target of its JGB purchase program, which was 7-12yrs before the announcement. Instead, the Bank says it will now purchase JGBs to keep 10yr yields at around 0%, effectively shifting to a yield target-type policy framework. The Bank still says it will still purchase JGBs more or less in line with its current pace, but its focus will now shift to yield curve management from the pace of QE expansion. To achieve this, the BOJ introduced two new operations, "outright purchases of JGBs with yields designated by the Bank (fixed-rate purchase operations)" and "Fixed-rate funds-supplying operations for a period of up to 10 years".

The Bank also amended its ETF purchase program but kept the pace of purchases unchanged. It plans to purchase JPY2.7trn of TOPIX linked ETFs, out of total ETF purchase program of JPY6trn. This tweak can be viewed as positive for the equity market, as the sustainability of its ETF purchase operations will be strengthened by these changes.

In terms of forward guidance, the BOJ decided to allow the overshooting in inflation more clearly. The Bank will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh foods) exceeds the price stability target of 2% and stays above this target in a stable manner, essentially ruling out any potential for a start to clear tightening as long as inflation remains below 2%.

In terms of the immediate policy decision, the BOJ did not cut its policy rate and left the pace of QQE expansion unchanged, but made the tweaks to QQE mentioned above.

The focus is shifting to yield targeting

The changes to the policy framework suggest the BOJ's focus is gradually shifting to a yield targeting framework from quantitative easing.

USD/JPY range trading is likely

Although the Bank left its policy rate unchanged, risk sentiment has so far been well supported and the magnitude of yield increases also appears relatively muted. Given subdued expectations ahead of the meeting, USD/JPY should stay relatively strong even without rate cut, thanks to a couple of positive surprises. At the same time, the outcome may not be significantly positive for USD/JPY. Ahead of the FOMC meeting, profit taking flow will likely exert downside pressure on USD/JPY, especially if the pair approaches 103.”

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