Japan: Monetary easing to revolve around moves to lower short- and long-term interest rates – Nomura

Takashi Miwa, Research Analyst at Nomura, notes that the BOJ decided to introduce a new framework for monetary easing called quantitative and qualitative monetary easing with yield curve control at its monetary policy meeting on 20–21 September.

Key Quotes

“This new framework targets both short-term interest rates (it retained the negative interest rate of -0.1% for policy-rate balances in current accounts held by financial institutions at the BOJ) and long-term interest rates. To be more precise, it has said that it will purchase JGBs so that 10-year JGB yields remain at around 0%. At the same time as introducing yield curve control, it agreed to remove the rule that limits the average remaining maturity of its long-term JGB purchases to around 7-12 years and to introduce fixed-rate funds-supplying operations for a period of up to 10 years.

It also made an inflation-overshooting commitment (enhanced forward guidance), committing itself to expanding the monetary base until the y-y rate of increase in the observed consumer price index (CPI) exceeds the price stability target of 2% and stays above the target in a stable manner.

Comprehensive assessment went as expected

The BOJ decided to introduce this new framework in response to its comprehensive assessment of monetary easing, the results of which we detail below. First, it said that one of the reasons why it had failed to achieve its inflation target was that there had been an inadequate rise in inflation expectations, and that raising these expectations might take time. Second, it said that whereas policies to date had pushed down real interest rates across the board, they had also resulted in an excessive flattening of the JGB yield curve and thereby raised concerns about the sustainability of financial functioning. The new framework appears to be an attempt to focus on measures that look likely to be effective in correcting these issues.

Retention of “quantitative and qualitative” easing is only lip service

While the BOJ has said that it remains committed to expanding the monetary base, keeping JGB purchases broadly at their current level of ¥80trn a year, its decision to shift the operating variable to long-term interest rates could be seen as indicating that it is now only paying lip service to the “quantitative” aspect of QQE. In reality, it looks as though the pace of BOJ purchases and monetary base expansion will on occasions be slower than to date. We think the BOJ decided to continue describing its policy as “quantitative and qualitative” easing because some policy board members strongly objected to a change in the policy framework that downgraded the quantitative aspect. It looks as though monetary policy will now revolve around bringing down policy rates (negative interest rates) and long-term interest rates.”