Bank of Japan (BOJ) action today confirmed that Japan wants:
• Stronger banks
• A steeper yield curve
• A broader and stronger stock market
• A possible overshoot on inflation
Specific Actions to Achieve These Goals:
• No added negative rates
, i.e., no added “tax” on bank reserve deposits
• Explicit board call for a steeper curve, to be achieved by shortening duration
of bond-buying program. Note here the quantity of BOJ bond buying stays unchanged—despite a coming increase in Japanese Government Bond (JGB)
issuance from a fiscal package
. The BOJ also has no specific bond yield
target—it just wants a steeper curve to raise the banks’ margins.
• Tilt the ¥6 trillion program to buy exchange-traded funds (ETFs) away from price-weighted Nikkei 225 (NK225)
and toward cap-weighted TOPIX (TPX)
—(TPX weight up from 42% to 70% of all annual ETF budget)
• The commitment to the 2% inflation target was actually strengthened—the board now explicitly seeks an “overshoot” to the target.1
In short: Nobody is in any hurry to taper or roll back quantitative easing
The message could not be clearer. This is a positive for Japanese equities, banks and financials in particular—and in my view, a negative for the yen.
From here, a most interesting new challenge will come from the fact that the BOJ did not specify a numerical target for bond yields. A steeper curve is desired, but how steep is steep enough?
Personally, I think this is good policy, as it adds uncertainty; in the coming weeks and months it will be interesting to see whether certain yield levels start triggering BOJ commentary. I have no doubt that markets will want to test where Governor Kuroda’s possible pain points may be. However, for now, the JGB yield rose and has room to run, in my view.
Read more about BOJ meeting implications.
Read Jesper Koll’s research on the BOJ stance.
Source: Bank of Japan, 9/21/2016.