BoJ’s QE revision – business as usual or a change in tactic?

Added 9th September 2016

The mere suggestion of a revision of the Bank of Japan’s monetary policy has already had an impact on government bond markets but the uncertainty surrounding the exact shape of governor Haruhiko Kuroda’s plan has left investors divided on whether genuine returns in the sector are possible.

BoJ’s QE revision – business as usual or a change in tactic?

Rather than dropping clear hints as to the BoJ’s course of action later in the month, Governor Kuroda left confusion in his wake after delivering a speech during the Kisaragi-kai meeting on Monday.

On the one hand, he underscored the “extremely powerful” effects produced following the BoJ’s decision to adopt the negative interest rate policy in January and argued for the necessity of monetary easing measures among advanced economies. And Kuroda freely admitted that he does not subscribe to the view that there is a “limit” to monetary easing. At the same time, he acknowledged the harm negative rates have inflicted on the lending habits of financial institutions and argued that the benefits of monetary easing should clearly outweigh the costs.

Professional investors responded to this lack of clarity in kind, offering mixed views on the attractiveness of the Japanese fixed income space.

M&G multi-asset fund manager Eric Lonergan is of the opinion that the significant degree of policy uncertainty has made the Japanese government bond market look particularly unattractive. 

“We really do not know what the BoJ is going to do next,” he said. “There are some ideas floating around as to the actions they could take that would be very bond negative. If you look at long-dated Japanese bonds, there is very little compensation for risks. Fiscal stimulus and other helicopter style monetary policy have only caused steepening of Japanese yield curves. Combine that with the fact that the collapse in government bond yields has had little material impact in corporate bond spending nor is it helping to drive consumer spending. It is very difficult for us to see how we can make money at this stage. Really, it is clearer for us to see lots of ways how to lose a lot of money,” he said.

Lonergan maintains an underlying assumption that the BoJ is unlikely to cut rates into further negative territory. “The market has been assuming rates will remain negative for a considerable period of time and it is not taking much to cause material reversals in the bond markets. Even the suggestion that QE has been exhausted in the bond markets as a sensible policy tool could have a significant impact on the asset class. This raises a significant question - how big a move would we see if the BoJ decided to genuinely change tact?”

Adrian Hull senior investment specialist in Kames Capital’s fixed income group suspects there are unlikely to be any drastic revelations come 21 September and the BoJ’s announcement will be “business as usual.”

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