BoJ initiates ‘yield curve control’

The announcement of the BOJ’s new monetary policy was met by a significant increase in Japanese equity prices, as the new regime helps address two major shortfalls of the old QE regime. 

First, it helps improve sustainability of the monetary easing. With the BOJ holding close to 40 per cent of outstanding Japanese Government Bonds, the bank’s commitment to strict asset-purchase targets could raise questions about long-term sustainability of the QE programme. The new regime allows the BOJ to be more flexible in asset purchase and hence ease concern about the amount of bonds available for purchase. 

Second, the new regime should ease concerns about the health of the banking sector. Before the announcement of the new policy, Japanese banks were squeezed by both the short and long ends of the interest-rate spectrum. In the short end, banks were required to pay interest on the cash parked at the central bank under the negative-rate policy, subtracting from banks’ profit. In the long end, bond yields were kept low because of the uncertainty about global economic growth following the surprise Brexit vote in late June. 

Low long-term bond yields, where banks’ lending rate is based, are impediments to banks’ revenue. By directly targeting long-term bond yields, the BOJ can “steepen” the yield curve, and support banks’ profit. 

In a bank-based economy like Japan, a healthy banking sector is quintessential to monetary-policy transmission and economic recovery.

We regard the BOJ’s new policy regime as a positive development and continue to prefer Japanese equities in our global asset-allocation strategy. 

 

Komsorn Prakobphol is head of strategy at the Tisco Economic Strategy Unit. He can be reached via www.tiscowealth.com or [email protected].