Japan: Just Enough QE to Satisfy Expectations

• The Bank of Japan (BoJ) today expanded its QE programme by JPY5trn to JPY70trn, broadly in line with market expectations. It also revised up both its growth and inflation forecasts, underscoring that the recent aggressive monetary easing has to some degree been driven by increasing political pressure for more aggressive monetary stimulus.
• The overall picture remains that monetary policy in Japan is now being eased more aggressively and the BoJ is poised to continue its asset purchases next year, when we expect most other major central banks to go on hold. We expect political pressure to remain an important factor as politicians have ample opportunity in 2012 and 2013 to influence monetary policy with two board seats currently vacant and the terms of board governor Shirakawa and the two deputy governors expiring next year.

Details

The BoJ today announced that it will boost its quantitative easing (QE) programme by JPY5trn to JPY70trn. Specifically, the limit for BoJ's asset purchasers will be raised by JPY10trn to JPY40trn. Close to 85% of the asset purchases will be targeted government bonds (the rest includes corporate bonds, commercial paper and exchange traded funds). The BoJ also announced that the maturity of its eligible government bond purchases would be increased to ‘one to three years' from ‘one to two years' previously.

The increase in the limit for the BoJ's asset purchases was partly offset by a JPY5trn cut in fund supplying operations (FSO) to JPY30trn. The FSO liquidity is currently provided with three and six months maturities and can be compared to the ECB's LTRO. In its statement, the BoJ said that the size of the FSO had been cut because of waning demand in connection with recent auctions.

Finally, the BoJ extended the time horizon for its asset purchase programme. It is now the BoJ's target that JPY35trn of the JPY40trn asset purchase programme will be utilised by the end of 2012. It targets complete utilisation of the asset purchase programme by June 2012 meaning that JPY5trn of asset purchases is now targeted for H1 13. Hence, with today's announcement, it is now official that the BoJ will continue its asset purchases next year.

In connection with today's monetary meeting, the BoJ also released revised macroeconomic forecasts from its board members (previous forecasts from January). For fiscal year (FY) 2012 (ending March 2013), the forecast for GDP growth was revised higher to 2.3%, from 2.0% previously. For FY 2013, the GDP forecast was revised marginally higher from 1.6% to 1.7%. For FY 2013, the inflation forecast was raised to 0.7%, from 0.5% previously. This suggests that the BoJ at least believes that the new 1% inflation target could be within reach in 2013.

Assessment and outlook

On balance, the BoJ's easing move today was in line with market expectations (we expected it to increase its asset purchase programme by JPY5trn). There was considerable political pressure on the BoJ to deliver some additional easing. The recent relatively aggressive monetary easing from the BoJ, despite its upward revision of its growth and inflation forecasts, underscores that the recent shift in monetary policy has at least to some degree been driven by increasing political pressure for more stimulus. In our view, politicians will have ample opportunity to influence monetary policy this year and next year. Two seats are currently vacant on the nine member board and the Japanese parliament is currently blocking the appointment of Kono to one of the vacant seats, because parliament regards Kono as too hawkish. Even more importantly, board governor Shirakawa's two deputy governors' terms expire next year (Shirakawa's term expires in April 2012).

While there were no great surprises in connection with today's monetary meeting, the big picture is that monetary policy in Japan is now being eased more aggressively. Our view has so far been that the BoJ, unlike most other major central banks, will continue its asset purchases next year. Basically, this has now become official, as the BoJ has reserved some of the increase in the limit for its asset purchases for next year (so far only JPY5trn). We expect the BoJ to raise the limit for its asset purchases further to create more space to continue its asset purchases next year. Our view has been that this would be done mainly in H2 12 but it could easily be frontloaded. We continue to believe that the pace of monetary easing in Japan will depend on exchange rate development. Should the JPY resume its appreciation trend for some reason, it would be met by more aggressive monetary easing.