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3 Feb 2016
BoJ: How far is too far? - ANZ
FXStreet (Delhi) – Research Team at ANZ, notes that the BoJ surprised at the end of last week by announcing it would adopt a negative discount rate.
Key Quotes
“The BoJ called it “adding another dimension” to its policy tool box, which now has three dimensions: quantity (money base increase at JPY 80trn per annum); quality (asset purchases – principally JPY 80trn/per annum JGBs, also JREIT and ETFs); and now, negative rates.
The two main reasons why the BoJ has done this are: first to force financial institutions to either lend out or invest in risky assets any money that they receive from selling JGBs to the BoJ under the QQE, and second, to extend the life of its current easing policy given its inflation goal is proving elusive.
On the last count the BoJ highlighted growing downside risks to both the outlook for growth and inflation from the recent financial market turmoil. The backdrop for the latter has been the sharp drop in oil prices and uncertainty over EM growth prospects particularly China.
We would also add that wage dynamics are not going its way. In particular, wage increases are not showing enough of a pick up to generate 2% inflation on a sustained basis. Last year Kuroda indicated that he would be prepared to act pre-emptively if wages did not increase more solidly. Financial markets took it as a shot in the arm that central banks are not finished yet and in the same vein as the ECB are willing to do “whatever it takes”. Equities markets surged 2- 3%, sovereign bond rallied with 10-yields falling 6-12.5bps and commodity markets bounced.”
Key Quotes
“The BoJ called it “adding another dimension” to its policy tool box, which now has three dimensions: quantity (money base increase at JPY 80trn per annum); quality (asset purchases – principally JPY 80trn/per annum JGBs, also JREIT and ETFs); and now, negative rates.
The two main reasons why the BoJ has done this are: first to force financial institutions to either lend out or invest in risky assets any money that they receive from selling JGBs to the BoJ under the QQE, and second, to extend the life of its current easing policy given its inflation goal is proving elusive.
On the last count the BoJ highlighted growing downside risks to both the outlook for growth and inflation from the recent financial market turmoil. The backdrop for the latter has been the sharp drop in oil prices and uncertainty over EM growth prospects particularly China.
We would also add that wage dynamics are not going its way. In particular, wage increases are not showing enough of a pick up to generate 2% inflation on a sustained basis. Last year Kuroda indicated that he would be prepared to act pre-emptively if wages did not increase more solidly. Financial markets took it as a shot in the arm that central banks are not finished yet and in the same vein as the ECB are willing to do “whatever it takes”. Equities markets surged 2- 3%, sovereign bond rallied with 10-yields falling 6-12.5bps and commodity markets bounced.”