Macquarie Bank isn't convinced the BoJ is about to shock financial markets

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  • The Bank of Japan will announce its July monetary policy decision later today.
  • Speculation the bank could tweak policy settings has increased substantially ahead of the decision, boosting Japanese bond yields and the Japanese yen.
  • Strategists at Macquarie Bank say that if any changes are made, they’re only likely to be cosmetic in nature, creating the risk that investors may unwind recent market moves.

If the Bank of Japan (BoJ) decides to tweak monetary policy settings on Tuesday, the changes are likely to be cosmetic only, according to strategists at Macquarie Bank.

And that means many of the moves seen in bond yields and the Japanese yen could well be unwound once the BoJ policy decision is announced.

“Japanese press sources suggest the Bank of Japan is poised to adjust its easing program on Tuesday. We take these reports seriously given their track record of correctly flagging previous policy changes. BoJ rhetoric by contrast has been less reliable,” Macquarie says.

“But we’re not convinced about the scale of shock in store. It will be incremental rather than explosive in our view.”

So what changes, if any, does Macquarie expect?

In short, little.

“Most importantly, we see no change to the two interest rate targets — the marginal overnight depo rate should remain at -10 basis points, while the 10-year Japanese government bond (JGB) target should remain anchored at ‘around zero percent’,” it says.

So, in Macquarie’s opinion, the BoJ’s quantitative and qualitative easing (QQE) with yield curve control (YCC) policy framework will be left unchanged, a scenario that it says could see markets unwind much of the moves seen in JGB yields and Japanese yen over the past week.

“Given over-egged market expectations, such an outcome could send USD/JPY moderately higher afterwards while JGB yields should settle back down,” it says.

“We can see why the market has been seduced by all this talk of impending policy adjustment.

“Even though inflation remains subdued, the side-effects of the BoJ’s easing program are becoming increasingly apparent. JGB trading has declined, and money market activity has been suffocated by the introduction of negatives rates.”

However, it says these concerns are not exactly new. And with inflation continuing to undershoot the BoJ’s 2% target, pointing to the likelihood of the bank downgrading its inflation forecasts today, it says there is little to suggest a major policy overhaul is imminent or warranted.

“On the rates side, the switch to a yield-curve targeting framework in September 2016 went a long way to ensuring the sustainability of the BoJ’s JGB purchasing program,” Macquarie says.

Macquarie Bank

“The pace of JGB accumulation has now declined to half of the original 80 trillion yen per annum, and less than half if we adjust for the decline in the Treasury bill holdings.

“BoJ holdings of government securities are already beginning to level off as a share of total outstanding — an encouraging sign for policy sustainability.”

Macquarie also says that there is very little pressure being applied by markets for the BoJ to change track, noting that 10-year JGB yields had been “very subdued before the recent press speculation appeared” and are “likely to go back to sleep once the policy decision is behind us.”

So the pressure for a change in QQE with YCC is largely absent and largely unwarranted given the recent slowdown in bond purchases and still-weak inflationary pressures.

However, Macqurie sees interest rate policy remaining the same, it thinks the greatest risk is that the BoJ will alter its purchases of Japanese stock exchange-traded funds (ETFs).

“On the equities side, sustainability pressures are more acute,” it says.

“On average, the BoJ continues to adhere to it purchase target of about 6 trillion yen annually. This cannot continue forever, and will need to be addressed at some point.

“Our base case is that the BoJ will tweak the composition of its equity ETF purchases to rein in its rising exposure to certain single-name stocks. But crucially, the total annual target for equity purchases should remain steady at about 6 trillion yen.”

The BoJ decision is likely to arrive at some point between 11.30am to 1.30pm Tokyo time on Tuesday. The general rule of thumb adhered to by markets is the longer it takes for the decision to arrive, the more likely it is that the bank has adjusted policy settings.

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