Bank of Japan Expands QE Modestly

• Bank of Japan (BoJ) today decided to expand the size of its non-conventional easing slightly. It was a consensus decision as two board members dissented.
• Although today's easing move was modest, it underlines that, unlike most other countries, Japan is far from starting to exit its non-conventional easing measures and might even ease further. Hence, contrary to last year, relative monetary policy should now really start to move in favour of a weaker JPY.

Economy improving and risks have become more balanced

At today's monetary meeting, BoJ as expected left its leading interest rate unchanged at 0.1%, but decided to expand its non-conventional easing measures slightly. However, there was not consensus on the BoJ board about the move, with Suda and Noda dissenting.

Specifically, BoJ will increase the amount of liquidity provided through its three-month fixed rate operation started in December last year from JPY10trn to JPY20trn. The interest rate on this facility is 0.1% and was introduced in December. At the moment, BoJ's main strategy is to try to push money market interest rates lower. This is the main purpose of the three-month fixed rate operation. We believe that BoJ prefers this strategy to stepping up the purchase of government bonds - first because it does not want to give the impression that it is bailing out the government, and second because it might believe there will be a greater impact on JPY from lower interest rates. Concern about the impact from the strong JPY in the wake of the Dubai crisis was the main reason for introducing the three-month fixed rate operation in December last year.

That said, today's move should only be regarded as minor easing. Part of the increase in the three-month fixed rate operation will only compensate for the reduction in liquidity from other non-conventional easing programmes that will expire in the coming months. We estimate the impact from the expiration of existing programmes to be a reduction in the liquidity by BoJ of JPY5trn. Nonetheless, the net impact from today's move should still be a slight expansion in liquidity.

BoJ was expected to announce some kind of expansion in its non-conventional programmes, and overall the size of the expansion was slightly higher than expected. However, it did not extend the maturities in the fixed rate operations, as had been speculated in the market.

Despite easing further, BoJ did not change its view on the economy in the statement, and at the press briefing board governor Shirakawa even said that “the economy is exceeding expectations a bit."

Impact

While today's easing move by BoJ was only a small move, it underlines that, unlike most other countries, Japan is far from starting to exit is non-conventional easing measures and might even ease further. Hence, relative monetary policy (contrary to last year) should really start to move in favour of a weaker JPY. We do not expect BoJ to raise its leading interest rate until H1 11.

Danske Bank
http://www.danskebank.com/danskeresearch

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