BOJ Eases Policy by Doubling ETF Purchases, Falls Short of Expectations – Reuters

By Leika Kihara

TOKYO – The Bank of Japan (BOJ) announced an expansion of its stimulus measures on Friday, doubling its purchases of exchange-traded funds (ETFs) in response to growing pressure from the government and financial markets for more aggressive action. However, the move fell short of the bolder measures some investors had hoped for.

The central bank indicated that it would conduct a comprehensive review of the impact of negative interest rates and its extensive asset-buying program in September, hinting that significant changes to its stimulus approach could be on the horizon.

Governor Haruhiko Kuroda explained that the review was not a signal that the bank’s policy tools had been exhausted, but rather an effort to explore more effective strategies for reaching its 2 percent inflation target, thereby keeping the door open for further monetary easing.

"I don’t believe we have hit the limit in terms of potential for more rate cuts or increased asset purchases," Kuroda stated to reporters following the policy meeting. "We will consider our monetary policy steps based on the results of this assessment."

At the conclusion of the two-day rate review, the BOJ decided to increase its ETF purchases, raising the total annual pace from 3.3 trillion yen to 6 trillion yen, with the decision supported by a 7-2 vote.

Despite this, the central bank maintained its base money target at 80 trillion yen and did not alter its asset purchasing pace for Japanese government bonds. It also kept the interest rate on a portion of excess reserves at 0.1 percent.

Following the BOJ’s announcement, the dollar dropped significantly, falling more than one yen to a low of 102.825, with overall declines nearing 2 percent, as the decision did not meet market expectations. The yield on the benchmark 10-year Japanese government bond briefly rose to minus 0.170 percent, the highest since late June, due to the BOJ’s reluctance to expand bond purchases.

"The BOJ did not meet expectations," remarked Norio Miyagawa, a senior economist at Mizuho Securities. "The increase in ETF purchases does little to help achieve the 2 percent inflation target. The BOJ won’t admit it, but it has likely reached the limits of its quantitative easing and negative rate strategies."

By coordinating its actions with the government’s recently announced $272 billion economic stimulus package, the BOJ aimed to amplify the impact of its initiatives in an economy struggling with prolonged stagnation.

"Japan is implementing a strong combination of flexible fiscal policy and quantitative easing," Kuroda noted. "The government’s stimulus package supports this effort and is timely for achieving sustainable growth and price stability."

IS MORE STIMULUS ON THE HORIZON?

The BOJ maintained its optimistic inflation forecasts for fiscal years 2017 and 2018 in a recent update of its projections. While it kept its timeline for achieving the 2 percent price growth target intact, it did caution that increasing uncertainties could lead to delays.

Kuroda rationalized Friday’s slight easing as a means to shield against external challenges, such as weak demand from emerging markets and the implications of Britain’s decision to leave the European Union, which could negatively influence business and consumer confidence.

Analysts believe that government and market pressures were key factors driving this decision, particularly after Japan’s economy minister advocated for more decisive action following Prime Minister Shinzo Abe’s announcement of a larger-than-anticipated 28 trillion yen stimulus package.

"The BOJ had little choice but to ease its policy this time, as markets were already anticipating new stimulus measures. Additionally, there was evident political pressure," explained Tsuyoshi Ueno, a senior economist at NLI Research Institute.

Concerns over the limited efficacy of the BOJ’s extensive stimulus measures, which have not succeeded in boosting inflation, have emerged among some policymakers. These issues may be addressed in the forthcoming review of current policies scheduled for September 20-21, although Kuroda dismissed any chance of modifying the price target or the timeline for achieving it.

He emphasized that there remains room for further deepening negative rates or increasing bond purchases, with some analysts suggesting that the upcoming review could result in more radical proposals.

"What’s significant is that the BOJ has committed to reassessing its policies at the next meeting, keeping the possibility of further easing alive," stated Shunsuke Yamada, chief currency strategist for Japan at Bank of America Merrill Lynch.

"This makes the next meeting crucial, and volatility in the yen is likely to persist until then."