Yes, the Bank of Japan Wants a Weaker Yen and Stronger Banks

Senior Advisor

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 in Japan.   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.         1Source: Bank of Japan, 9/21/2016.

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About the Contributor
Senior Advisor
Jesper Koll is a Senior Advisor to WisdomTree. Over the past two decades Jesper has been consistently ranked as one of the top Japan strategists/economists, working as Chief Strategist and Head of Research for major U.S. investment banks J.P. Morgan and Merrill Lynch. His analysis and insights have earned him a position on several Japanese government advisory committees and Jesper is also one of the few non-Japanese members of the Keizai Doyukai, the Japan Association of Corporate Executives. He has written two books in Japanese, Towards a New Japanese Golden Age and The End of Heisei Deflation. After arriving in Japan in 1986 Jesper initially worked as an aide to a Member of Parliament. Jesper has a Masters degree from the School of Advanced and International Studies at Johns Hopkins University and was a research fellow at both Tokyo University and Kyoto University. He is a graduate of the Lester B. Pearson College of the Pacific.