BoJ policy could be about to get even more radical

  • The BoJ will announce its first monetary policy decision of the year on Wednesday. It’s likely to be a yawn-fest for financial markets.
  • ANZ Bank says that may not remain the case for long, suggesting risks for additional monetary policy easing are growing given the recent fall in global bond yields.
  • The BoJ’s key policy rate is already in negative territory. It’s also conducting QE to depress Japanese bond yields at ultra-low levels.

The Bank of Japan (BoJ) has just begun its first monetary policy meeting of 2019, with the policy decision due on Wednesday.

It’s widely expected to keep its Quantitative and Qualitative Easing with Yield Curve Control program unchanged, seeing the bank purchase sufficient Japanese government bonds (JGBs) to keep benchmark 10-year yields anchored 20 basis points either side of 0%. The key policy rate will also remain at -0.1%, as it has been since early 2016.

While there’s widespread expectation the bank will reduce its inflation forecasts for the years ahead, a scenario that has become the norm rather than the exception for many years, the policy decision appears all but certain to be a yawn-fest for financial markets.

Tom Kenny, Senior Economist at ANZ Bank, says that may not remain that case for long.

Given the recent slide in global bond yields, he says the BoJ may soon be forced to deliver even more aggressive monetary policy easing.

“[The BoJ Board] appears to be in a bind with the recent weakening in global yields. This is problematic on two fronts,” Kenny says.

“Firstly, if the BoJ continues to anchor longer term rates at zero, yield differentials with other major trading partners could narrow and put upward pressure on the Japanese yen.

“Secondly, downward pressure on global yields means the BoJ is less likely to need to purchase JGBs to achieve its 10-year yield target. The central bank is currently buying at less than half the annual pace of the 80 trillion yen it set as an annual target in October 2014. Fewer asset purchases could be less stimulatory.”

So with global bond yields falling sharply late last year, and still well below the cyclical peaks even with the modest recovery seen early this year, narrowing yield differentials could see investors begin to favour Japanese assets, placing upward pressure on the yen. And with less BoJ bond purchase required to keep 10-year yields anchored at ultra-low levels, that could reduce the flow of capital into other sectors of the Japanese economy, limiting its effectiveness in stimulating activity.

That will be a bind for the BoJ as Kenny suggests, particularly should expectations for the global economy, and bond yields, remain depressed.

“Lower global yields are not necessarily a problem for the BoJ yet, but they could be if US Treasury yields were to decline again,” he says.

“Should that happen, it may need to consider new options to ease policy.”

That suggests the BoJ may soon have to re-write the rule book on unconventional measures to stimulate demand. Given Japan’s crippling debt levels, perhaps an attempt to alleviate that burden may be the next port of call.