The Bank of Japan (BoJ) has announced changes to its policy measures aimed at fighting deflationary pressures. Following two days of meetings, bank governor Haruhiko Kuroda announced a yield goal of zero percent for 10-year government bonds, the first time in the bank’s history that a policy directly targeting long-term rates has been adopted.
The Bank of Japan has set an explicit yield target of zero percent for 10-year government bonds.
Before the new policies were announced the yield on 10-year government debt was negative 0.06% but rose by more than three basis points following the news.
Kuroda also announced that the deposit rate would be left unchanged at -0.1%, and committed to expanding the monetary base until inflation ‘exceeded’ 2% and stabilized beyond that level.
The announcement has been met with mixed reviews. Some market commentators have interpreted the news as confirmation that the bank will do whatever it takes to deal with deflationary pressures in the economy, while others see it as symbolic of the ineffectiveness of current policies and possible depletion of tactics in the bank’s toolkit.
Tomoya Masanao, Head of Portfolio Management Japan at asset manager and ETF issuer Pimco, commented: “Today’s decision is a clear regime shift from base-money targeting to yield-curve targeting against the “New Neutral” yield curve.
“The decision is in part a reflection of the BOJ’s recognition that base money expansion itself has little easing effect and that Japan’s neutral yield curve, which is neither expansionary nor contractionary for the economy, is steeper than the bank would have thought. The actual yield curve should not be too flat relative to the neutral curve otherwise the economy will be negatively affected through weakening of financial intermediation.
“The decision is also an optimization of the BOJ’s toolkit for longevity of monetary easing – given that a war against deflation is likely to take longer than they thought – under the constraints of a practical limit on the Japanese Government Bond purchase amount and the effective lower bound of the yield curve.
“The BOJ will stay in the game for many years but will no longer take the lead. The BOJ alone cannot win the deflation war, unless economic growth expectations increase.”
Michael Metcalfe, Head of Global Macro Strategy, State Street Global Markets, said: “The fact that the flattening of the yield curve has gotten to a point where it has elicited a policy response could mark the beginning of the end of quantitative easing. Just as interest rates have reached their lower bound, asset purchases, in government bonds at least, may have reached their upper bound. Other central banks, the ECB especially will take close note.”
Antoine Lesné, EMEA Head of ETF strategy at SPDR ETFs, added: “Over the past two days the Bank of Japan was meeting to assess the effectiveness of the current monetary policy framework. The target of 2% inflation and how to achieve it effectively conducted the BoJ to act. While it may not be viewed as a reduction of the easing stance by the BoJ but rather an enhancement of the policy effectiveness. The market may need to digest this change but this could strengthen the yen for a while and may put into question the effectiveness of forward guidance.”
The announcement has been positive for Japanese equity ETFs, with all the main indices rallying. The Nikkei 225 Index, underlying index to a number of ETFs including the $210m iShares Nikkei 225 UCITS ETF (Xetra: EXX7), finished the day up 1.9% in local terms. The Topix Index, representing over 1,800 companies listed on the Tokyo Stock Exchange and reference for a host of ETFs including the $1bn Lyxor Japan Topix ETF (LON: JPNU), was up 2.7%. The MSCI Japan Index also gained a comparable amount, boosting ETFs such as the $2bn iShares MSCI Japan UCITS ETF (IJPN).
Investors in long JPY/ short USD currency ETPs, such as the ETFS Long JPY Short USD (LON: LJPY), have also benefited, thanks to the yen appreciating by about 1% against the dollar.
Meanwhile yields on government bonds, or JGBs, rose slightly, with the 10-year yield up about 3.5 basis points, pushing down JGB ETFs, such as the $68m db x-trackers Markit iBoxx Japan Sovereign UCITS ETF (Xetra: XJSE).