Japan: Unclear what BoJ thinks on QE – AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that it appears that the BoJ may be moving in the direction of lowering the cash rate but it is unclear what they may do with QE. 

Key Quotes

“It is possible they adjust the pace of purchases to calibrate them with some overall yield level target.  This may help steepen the curve, especially if the JPY were to weaken.

But the key has to be the level of perceived real long term yields.  Ideally the BoJ would like to see a steeper yield curve resulting from higher inflation expectations, not higher real yields.

Ultimately the purpose of QE asset purchases is to lower real yields to encourage more investment.  The actual volume of QE may be less relevant than the overall level of yields.  As such, I do not think it follows that a recalibration of JGB purchases is necessarily bullish for the JPY.  I do not see it counteracting the possible negative reaction the JPY should have to a further lowering of the cash rate target.

In His Jackson Hole speech, Kuroda’s also noted that Japanese long term bond yields fell much more than cash rates, after he implemented NIRP combined with QE.  And, furthermore, this reaction was much greater than that experienced in Europe in response to the ECBs NIRP/QE policy.  Although cautious to not say too much, one might conclude from his remarks that he might prefer a steeper yield curve.  A steeper yield curve might be seen as less negative for Japanese bank profitability and Japanese stocks.”