Flash Notes

This probably goes down as yet another disappointment from the Bank of Japan (BOJ) as the BOJ under-delivered in today’s (29 Jul)monetary policy decision after the markets had built up expectations for more substantial monetary stimulus.

    The BOJ’s ”Enhancement of Monetary Easing” measures in July MPM included:1. Increase BOJ’s purchase of exchange-traded funds (ETFs) to JPY6trn annually (from JPY3.3trn) by 7-2 majority vote2. Increase BOJ’s US dollar lending program to US$24bn (from US$12bn previously)3. BOJ to establish a new facility in which BOJ lends Japanese government securities (JGS) to FIs against their current accountbalances with the BOJ so that these JGS can be pledged as collateral for the US dollar Funds-Supplying Operations.

    However, the BOJ disappointed by maintaining its pledge of expanding the monetary base at an annual pace of 80 trillion yen,kept its J-REITs, CP and corporate bond buying programs unchanged, and it also kept its -0.1% Policy-Rate Balances interest rateunchanged. The BOJ did announce a loan measure of JPY300bn at zero interest rate to provide help to the region affected by thealso reiterated that it will continue with its 3-dimensional QQE (quantity, quality and negative rates) until 2% inflation is achieved in astable manner and that it “will examine risks to economic activity and prices, and take additional easing measures in terms ofthree dimensions -- quantity, quality, and the interest rate -- if it is judged necessary for achieving the price stability target.”(which was unchanged since the March 2016 MPM).

    An important announcement the BOJ made in its July statement is that the central bank will conduct a comprehensive assessmentof the developments in economic activity & prices under “QQE” and “QQE with a Negative Inetrest Rate” as well as thesepolicy effects in the next MPM (i.e. 20/21 Sep 2016 MPM).

    The latest BOJ decision measure was again not decided under a unanimous vote with the usual dissenter, board member Mr. T.

    Kiuchi & another board member Mr. T. Sato, were both against increasing the BOJ’s ETF purchase to JPY6trn. In addition, Boardmember Mr. T. Sato and Kiuchi both objected again to continue applying a negative interest rate of -0.1% to the Policy-Rate Balancesin current accounts held by financial institutions at the BOJ, because negative interest rates would impair the functioning of financialmarkets and financial intermediation as well as the stability in the JGB market. Kiuchi again put his repeated proposals for reducingthe asset purchase program to an annual pace of about 45 trillion yen, and was again soundly defeated.

    The yen strengthened markedly following the BOJ weak stimulus delivery as the USD/JPY dipped to a low of 102.90 (from around104.85 just before the announcement) (as of 1pm Singapore time). And while the Japan JGB yields remained in negative territory upto the 10-year yields, yields were markedly higher across the curve with gains of >9bps to one-month highs. (as of 1pm Singaporetime). Similarly, Japan bank stocks also gained on the back of BOJ keeping its JGB buying unchanged. The Nikkei 225 index (whichwas already in negative territory prior the BOJ announcement) initially worsened its slide into negative territory but eventually closing0.5% higher to end at 16,569.27 on the higher bank shares.

    BOJ’s Economic Outlook