BOJ to Extend and Expand QE

The Bank of Japan will likely extend the duration and expand the size of the new lending facility (launched in December) so as to fight against deflation. This is likely the only change the central bank will announce after the Monetary Policy Meeting on March 16-17. The unsecured overnight call rate targets will stay at 0.1% with unanimous vote while outright purchase of JGB will not be increased.

The BOJ announced a 10-trillion-yen liquidity program after holding the emergency meeting on December 1. While policymakers stayed on sidelines at regular meetings over the past 3 months, they will likely roll out further plans to rescue the economy in March. As the policy rate has been brought to almost zero, measures other than directly taking down interest rates are more favorable.

We expect the central bank will double the amount of money injected through its new operation from the current 10 trillion yen to 20 trillion yen, while duration will be extended from 3 months to 6 months. The move is in fact widely anticipated. We mentioned it in our 'Currency Outlook: JPY' on January 27 while the Nikkei newspaper also talked about it last week. Therefore, the market will possibly not react vigorously after the announcement. However, the BOJ will do it as it will effectively 'substitute' the 'special corporate finance operations' that end this month. Moreover, it signals the central bank's determination to maintain an 'extremely accommodative financial environment'.

The BOJ will unlikely increase outright purchases of JGBs at current stage, despite pressures from the government. History suggests that the central bank will adopt this only in emergency. Moreover, the governor Masaaki Shirakawa does not seem to favor such policy for the moment. Last month, Shirakawa noted that 'Monetary policy isn't aimed at fiscal funding… It's aimed at achieving sustainable growth under stable prices. It's important that governments respect this stance and markets have faith in it'.

Concerning economic outlook, the BOJ will reiterate the stance that 'Japan's economy is picking up mainly due to various policy measures taken at home and abroad, although there is not yet sufficient momentum to support a self-sustaining recovery in domestic private demand