BOJ Surprises, But Substance Minor

The Bank of Japan was the fourth major central bank to meet this week. Sweden and Norway kept policy unchanged. The Fed hiked. The BOJ was not expected to do anything. Governor Kuroda surprised the market with largely operational tweaks to what Japan calls Qualitative and Quantitative Easing. Initially, and perhaps with the help of headline reading algos, the yen sold off and Japanese shares rallied. As cooler, or perhaps human, heads prevailed, the markets reversed.  

There are five adjustments to Japan’s unorthodox monetary policy.  However, it should be noted upfront that the expansion of the BOJ’s balance sheet remains unchanged at JPY80 trillion a year.  

1.JGBs--the BOJ will lengthen the maturities it buys from 10 to 12 years.  

2.REITs–the prior cap, limiting BOJ ownership to 5% of any issue has been raised to 10%

3.Loans–There were two corporate loan programs that pre-dated Kuroda’s appointment.These were extended 

4.Collateral–the BOJ will now accept foreign currency denominated loans and housing loans as collateral. BOJ buying of JGBs removes instruments that Japanese banks use as collateral

5.ETFs–This is the most complicated of the measures announced. In addition, to the JPY3 trillion of ETF purchases, the BOJ appeared to offer a new JPY300 bln buying program. However, this is offset in full buy a BOJ equity selling program that is to begin at the start of the new fiscal year in April, to facilitate the bank unwinding cross shareholdings. The BOJ will begin selling the shares it acquired through this start in April. It anticipates selling about JPY300 bln a year. It did extend by 4.5 years (to March 2026) this program. 

We think there is validity in Kuroda’s argument that the measures announced do not amount to additional easing. He argued these measures were operationally necessary. Three board members objected. The markets seem confused and whipsawed. The Nikkei initially jumped 3%, reversed and closed on its lows, which were about 2% below the previous day’s close. The reversal saw the Nikkei close the downside gap created by Thursday’s sharply higher opening