Japanese central bank sticks to its guns

Although a change in Japan’s monetary policy was not necessarily a matter of urgency given an inflation rate that refuses to accelerate and the lingering uncertainty about foreign trade policy that hangs in the air like a sword of Damocles, there has nevertheless been speculation in the market about a fundamental strategic reorientation ahead of today’s BoJ meeting. This speculation left out hardly any option, ranging from changing the interest rate target through eliminating the negative interest rate to officially reducing the JGB’s asset purchases – regardless of how unlikely such options would have been when looked at in a sober light. The source of this speculation was not, for example, a reappraisal of the fundamental situation, but information from “usually well-informed circles,” according to which the BoJ (no further concrete information was revealed) would decide to make “changes.”

And “changes” there have been. But this has nothing in common with the BoJ’s ultra-loose monetary policy, it is rather a matter of placing monetary policy on a more sustainable basis. (And it is naturally also a matter of achieving price stability, but this target has receded into the remote distance and its mention is hardly more than icing on the cake.)

The two most important changes are greater flexibility with respect to the yield target and the introduction of a forward guidance. The Bank of Japan explicitly emphasizes that it will stick to the interest rate target of 0.00% for ten-year JGBs. What is new is the rider that yields may be allowed to move to a limited extent in either direction. (“The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain at around zero per cent. While doing so, the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices.”) But if interest rates were to rise rapidly, the central bank would intervene immediately and appropriately. During the press conference central bank governor Kuroda emphasized several times that there is no intention whatsoever of widening the JGB trading range in this way, never mind of paving the way for higher yields. This commitment also fits the developments of the last few days when the BoJ offered unlimited purchases of 10-year JGBs at 0.11% several times in order to stem the latest rise in yields.

By introducing the “forward guidance” the Bank of Japan has probably managed for the foreseeable future to avert premature speculation about an exit from the ultra-loose monetary policy. The current environment of extremely low interest rates is to be maintained for a longer period of time, according to the key formula with which other big central banks ranging from the ECB to the Fed have anchored their policy of low interest rates world-wide. (“The Bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time”).

So market observers will probably no longer track individual JGB auctions in order to fine toothcomb them for signs of the BoJ’s alleged exit intentions as they have in the past. Nor should the yen draw any benefit in the foreseeable future from the monetary policy factor. The currency’s identity crisis as a safe haven is thus becoming increasingly relevant. While Japan’s currency has proven to be a reliable safe haven in various crises during the past decades, for a few weeks now there has been a lack of the familiar connection between heightened risk-aversion and a firmer yen. One theory on this is that the (negative) economic consequences of the trade dispute with the USA are increasingly priced into the yen. What is legitimate for other currencies (namely taking the domestic growth outlook into account) would be new ground for the yen. However, we still lack further indications to verify such a long-term structural transformation. For the foreseeable future, therefore, we see the yen torn between burgeoning global risk-aversion (yen positive) and a doggedly ultra-accommodative BoJ policy (yen negative).

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