Japan’s Great Monetary Experiment Begins — Here’s What You Need To Know

Haruhiko Kuroda
Haruhiko Kuroda

This is it – the moment the Abenomics-watchers have been waiting for.

Overnight, the Bank of Japan will conclude its first monetary policy meeting with new BoJ Governor Haruhiko Kuroda at the helm.

So far, Japan’s great “Abenomics” experiment – which seeks to employ bold policy tools to overcome more than a decade of deflation – has been mostly talk.

Tonight, the rubber meets the road for Kuroda, the monetary policy dove selected by recently-elected Japanese Prime Minister Shinzo Abe to lead the charge from the BoJ, which has to do a lot of the heavy lifting.

There are a few things everyone is looking for, according to analysts at Morgan Stanley, BofA Merrill Lynch, and Deutsche Bank – an increase in the size of the Bank of Japan’s quantitative easing program, a directive to start buying longer-dated bonds as part of those asset purchases, a cut in the interest rate the central bank pays on excess reserves, and stepped-up purchases of risk assets like ETFs.

Below is what BAML analysts Shogo Fujita, Masayuki Kichikawa and Shuichi Ohsaki predict for Kuroda’s meeting.

  • Announcement of early introduction of an open-ended framework (FY13).
  • A suggestion of a forward-guidance framework. (such as “easing to continue until a 2% inflation target is feasibly attainable”)
  • Announcement of elimination of the banknote rule and unification of JGB purchases through the APP and rinban operations. (We expect the APP will be maintained for risk assets, integration will depend on the construction of procedural systems i.e. will not be immediate)
  • Extension of the central JGB purchasing zone to longer maturities (with the shift to full rinban this is fully expected, extension to 10 years, plus small rinban increases in the 10- to 30-year range expected, the BoJ may defer announcement of details/technicalities for a later date).
  • After unification of JGB purchasing operations, an increase in the current monthly purchase amount from slightly under ¥5tn to ¥10tn (possibly with a move to net purchase targets like the FRB, implementations and details may come at a later date).
  • Announce gradual elimination of fixed-term funding operations. (A shift to JGB purchases likely. This would make it unnecessary to lower the IOER. Implementations and details may come at a later date.)
  • Announcement of the BoJ’s intention to increase purchases of risk assets such as such as ETF, J-REIT, corporate bonds, and CP. (Details to be provided at a later date, but the BoJ’s capital will have to be reinforced or BoJ will have to receive a government guarantee against losses if it is to increase risk asset purchases. We believe the most credible option is for the APP to handle only risk assets and for the government to provide a first-loss guarantee scheme for the APP up to a certain amount.) 

Deutsche Bank analyst Makoto Yamashita says the market will “hinge on the details” of tonight’s meeting.

“We expect BoJ Governor Haruhiko Kuroda to emphasise a regime shift at the Bank, which is likely to become a catalyst for yen depreciation and a rise in stocks,” says Yamashita.

That would be welcome news for investors betting against the yen, which is expected to continue falling as a result of Abenomics policy initiatives, but has found a bit of support in recent weeks, effectively stalling one of the most popular currency trades in the world.

According to Bloomberg, Kuroda may hold a press conference tonight at midnight following the conclusion of the central bank’s meeting on monetary policy.