Bank of Japan’s new weapon in inflation fight gets mixed reception

Added 21st September 2016

With news overnight that the Bank of Japan has unveiled a new form of stimulus, professional investors and economists reacted with mixed enthusiasm.

Bank of Japan’s new weapon in inflation fight gets mixed reception

Markets also had a positive but unspectacular reaction to the announcement with Japan’s Nikkei 225 closing 1.9% up at 16,807, the FTSE 100 trading up 0.4% at 6858 and the FTSE 250 up 0.6% at 18,009 by mid morning.

The launch of ‘yield curve control’ by the BoJ essentially involves imposing the short term rate on the longer-term 10-year part of the curve, combined with making a fresh commitment to keep stimulus measures in place until inflation beats the 2% target rate.

The central bank also said is was relaxing the target of expanding the monetary base by ¥80 trillion a year, in favour of a flexible total.   

Trevor Greetham, head of multi asset at Royal London Asset Management, said the BoJ’s move represents ‘helicopter money in all but name’ and it is supportive of RLAM’s overweight stance in Japanese equities.

“Japan has been suffering from excessive debt and deflationary pressure for longer than any other developed market, so we should watch new policy developments in Tokyo with interest,” Greetham said. “Today's announcement makes it clear that the authorities are going down the route of explicit financial repression, boosting nominal growth while keeping interest rates near zero at all maturities. The idea is to transfer wealth from savers to borrowers, the government included, to reduce debt burdens and wipe the slate clean.”

“The BoJ decisions overnight mean that they now believe they have 3 levers to pull: overnight interest rates, the size of the balance sheet and the 10-year yield,” said Mitul Patel, head of interest rates at Henderson Global Investors. “In practice, since they cannot set all 3 variables, there may be trade-offs involved. If for example 10 year yields stayed stable with significantly fewer JGB purchases, this may make it more difficult to meet their balance sheet expansion targets.” The BoJ also passed on the opportunity to take rates more negative at this juncture, though this may yet be revisited at future meetings. The initial market response has seen a weaker yen, stronger Japanese stock markets and higher JGB yields.”

“It is however, tough to see how today's announcement is anything more than an adjustment to the current programme, and without anything radically new or bold, the BoJ's 2% inflation target continues to looking aspirational rather than likely,” Patel added.  

Maxime Alimi, senior economist at AXA Investment Managers, sees the changes as only ‘incremental’.

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Alex Sebastian

News editor

Alex joined Portfolio Adviser in April 2014 and has been a financial journalist since 2008. He has previously held editorial positions at the Financial Times Group and Euromoney Institutional Investor. Alex is NCTJ qualified and has a degree in economics from the University of Sussex.



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