First, from Goldman's Themistoklis Fiotakis
Bank of Japan Delivers; Dollar is Bid Across the Board in Response
Earlier this morning the BoJ introduced a comprehensive change to its monetary policy framework. The asset purchasing program will be merged with the outright JGB purchase program (rinban), and JGB purchases will be expanded to include all maturities, including 40-year bonds. The pace of JGB purchases by the BoJ will be accelerated to ¥7trn per month from just under ¥4trn currently (on a gross basis), and purchases of ETFs and J-REITs will also be increased. The main operating target for money market operations was changed to a monetary base control (a quantitative index) from the uncollateralized overnight call rate.
The size and speed of these measures were a dovish surprise to markets. The Yen has weakened against a number of currencies; indicatively $/JPY moved from 92.9 to 95.4. The JPY is returning to levels prevailing in the weeks before the market started to reflect concerns about a potential BoJ disappointment. Given the dovish surprise vis a vis initial expectations, the risks are for a $/JPY move higher in the near term. Interestingly, the move in the Yen has also benefited the Dollar more broadly, with DXY moving up 0.7% this morning. The Dollar move combined with market expectations of a dovish ECB led the EUR down to 1.2792 this morning (from 1.2850).
The Nikkei closed up over 2% despite falling around 1% earlier in the session. Long-term Japanese rates declined, with the 10-year rate falling by around 10bp. The largest impact, however, was at the long end of the curve, with the 30-year yield down 22bp. The flattening of the curve is in line with our fixed income views and has benefited our trade recommendation for a 10s20s JGB flattener; we initiated our recommendation last Thursday at a level of 92bp and it is currently at 77bp, 12bp away from the target of 65.
Events today include the ECB and BoE meetings. For the ECB, we do not expect any change to interest rates, and any easing is more likely to come in the form of credit easing measures that target the impaired transmission mechanism within the Euro area. We expect the BoE to keep policy unchanged as it prepares to extend the FLS and explore other non-QE easing options.
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And next, from SocGen's Kiyoko Katahira
BoJ announces bold policy change
The BoJ meeting concluded with an introduction of a new “quantitative and qualitative monetary easing,” aiming to achieve the inflation target of 2% within a time horizon of about 2 years. Overall, the decision made by the BoJ was indeed “bold”, and the market reacted positively - the yen dropped (USD/JPY jumped from 93 to close to mid-95) and the Nikkei stock surged. The yield on JGBs from 5 years to 30 years broadly declined, with the 10y yield reaching the lowest since June 2003.
The BoJ’s decision – abolished policy rate, APP and bank note rule
The BoJ has decided the following:
- Intoduction of the “monetary base control”: The bank will shift the main operation target from the current policy rate (uncollateralized overnight call rate ) to the monetary base. The BoJ will conduct money market operations so that the monetary base will increase at an annual pace of 60-70 trillion yen. The monetary base which was 138 trillion yen as of end of 2012 will be increased to 200 trillion yen (+45% yoy) by the end of 2013 and to 270 trillion yen (+35% yoy) by the end of 2014.
- The bank will also terminate the Asset Purchase Program (APP) and combine with the regular JGB purchases known as Rinban operations. Purchases of JGBs will be increased substantially, and the JGBs held will increase at an annual pace of about 50 trillion yen. As of end of 2013, the bank’s holding of JGBs will increase to 140 trillion yen as compared to 89 as of end of 2012. The bank will further increase the JGBs held to 190 trillion yen by the end of 2014. It has also decided to purchase JGBs with longer maturity – the average remaining maturity of the JGB purchases will be extended from 3 years to about 7 years.. This will allow the bank to purchase JGBs with all maturities including 40-year bonds. It has also decided to increase the purchases of ETFs by 1 trillion yen in 2013 and another 1 trillion yen in 2014. As for J-Reits, the amount is small, but will increase by 300 billion yen in both 2013 and 2014.
- The bank has also decided to suspend the so-called “Bank note rule” which limits the amount of JGBs it can hold on its balance sheet to the amount of outstanding bank notes. However, in our view, this rule has already been violated in practice and we see little impact.
Overall, the decision by the BoJ was indeed bold. It will increase the JGB purchases substantially from the current pace (about 4 trillion yen per month) to about 7 trillion yen per month. It has combined the two separate asset purchase programmes which will help increase transparency of policy and make communications with the market more straight-forward. The Rinban operations tended to be overlooked by a market that had been focused on the APP. It has extended the average remaining maturities of the JGBs to be bought, allowing it to buy even super-long JGBs, which will certainly reduce yields along the yield curve, just as Mr Kuroda has stressed during his speech over the last few weeks. The BoJ has also announced to set forums for enhanced dialogue with market participants – aiming to exchange views on money market operations in general.
As we had expected, the new BoJ has broken with the cautious policies of the past and has started a monetary policy that can be called “bold”, just as the PM Abe has demanded. We wait to see for further implications ahead.


