Stripped down to its core, the changes made yesterday by the Bank of Japan to its monetary policy stance are nothing more that an attempt to stop the carping and moaning from the country’s banks about the impact of the central bank’s negative interest rate policy (NIRP), and negative rates for Japanese government bonds.
The BOJ said it would start targeting 10-year interest rates, committing to keep them around zero as part of a new policy framework aimed at stoking inflation. The BOJ also said it would continue quantitative easing until inflation “exceeds” 2%, effectively strengthening its commitment to continue its aggressive easing.
The Bank of Japan also kept its 2% inflation target, despite not meeting ist long stated goal of reaching that level via its policy of expanding money supply and spending billions of dollars buying government bonds and shares and other securities.
That just didn’t work as deflation continues to grip the economy.
The new steps, which are aimed at helping the country’s banking sector, pushed up Japanese shares (and those in Australia as well).
The benchmark Nikkei Stock Average jumped 1.9% to 16,807, while the ASX 200 ended rose 0.7% as investors piled into banking stocks in both countries, after the Japanese central bank introduced a target for the country’s bond yield curve.
That sparked a selloff in bonds, the yen eased (though the Aussie dollar fell, then rebounded) as the idea of the yen as a safe haven for nervy buyers faded (and the same for investments in Australia).
The ASX 200 Index and the broader All Ordinaries Index 0.7% and 0.6% to 5339.6 points and 5429.4 points respectively.
The big four banks lifted the Australian market higher, with ANZ and National Australia Bank leading the way and closing more than 1% higher, Westpac rose 0.6% and the Commonwealth lagged the field, rising only 0.3%. Japanese bank stocks rose 6.8% yesterday. European bank stocks rose last night, and markets also ended higher.
The Bank of Japan has effectively shifted the focus of its monetary stimulus away from a rigid target for expanding the supply of money, to controlling the shape of yields across different maturities.
The BoJ kept the 0.1% negative interest rate it applies to some of the excess reserves that financial institutions leave with the central bank.
But it scrapped a target for the average maturity of its government bond holdings, instead setting what it called a “yield curve control” under which it will buy or sell long-term government bonds to keep 10-year bond yields around current levels of zero per cent.
It acknowledged that excessive falls in yields – or the extreme flattening of the yield curve – could have an adverse impact on the economy by hurting sentiment. It was certainly hurting the country’s banks and other financial groups who were complaining noisily.
The new policy will allow longer dated yields to rise slowly above zero per cent. That will see the yield curve steepen, making it easier for banks and other financial groups to make profits and to invest (such as insurers).
The rise in bank and finance stocks (insurers especially) showed relief that the Bank of Japan did not cut rates deeper into negative territory. It is hoped that a potential “steepening” of the yield curve, when the gap between long and short term bond yields widens, could help alleviate pressure on profitability.
If this happened and the shape of the curve is maintained, then banks will be able to start re-pricing assets such as loans and bonds.
"The BoJ’s decision to steepen the yield curve showed they are taking into account the situation of financial institutions," said Takeshi Minami, chief economist at Norinchukin Research Institute. And “This is positive for the equity market too, especially bank stocks,” Michael Moen, fixed income investment manager at Aberdeen Asset Management, told Reuters.
“They’ve acknowledged the negative rate policy can hurt bank profits, and these measures they’ve announced today are in a way trying to offset some of that negative impact,” he said.
The bank also said it would continue expanding its monetary base until consumer price inflation exceeds 2% and stays above the target “in a stable manner”.
The immediate reaction was for the Japanese 10-year bond yield to jump above zero per cent for the first time since March.
