Bank of Japan monetary policy meeting - this via Credit Agricole in Tokyo

In summary:

  1. The Bank of Japan will make no changes to the current monetary policy settings (the interest rate on the excess reserves (IOER) at - 0.10% and the 10Y JGB yield target at zero% ) and will also leave the "JPY80trln" language intact to describe the pace of increase in the balances of its JGB holdings. However, the language no longer means anything as the quantity of money has already become an endogenous variable rather than a policy variable.
  2. The Bank also releases the quarterly outlook report. While real GDP outlook (median of forecasts by board members) will be revised up slightly, CPI (excluding fresh food) will be revised down. However, such downward revisions to the Bank's CPI forecasts will not trigger any policy given that they are almost conventional by now.
  3. As we have persistently argued, it is the way the BoJ communicates that matters more than its policies and the issue lies in its forward guidance. The BoJ bases its forward guidance on the "inflation-overshooting commitment" but it has not served well as such with the commitment not showing any policy instruments (IOER or 10Y JGB yield).


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I wanted to keep this brief, but CA make some great points here, so some elaboration.

On point #1:

  • the "JPY80trln" language to increase the balances of its JGB holdings will also be unchanged. However, the language no longer means anything as the quantity of money (JGB purchases or monetary base) has already become an endogenous variable rather than a policy variable under the yield curve control scheme.
  • We currently expect the "JPY80trln" language to be dropped at the October or December MPM
  • However, we emphasize that it represents no policy changes ... Quantity is no longer a policy variable as confirmed by fixed-rate JGB purchases Under the present monetary policy settings, the main policy tools are nominal interest rates while the quantity of money no longer serves the role
  • The BoJ reconfirmed this view on 7 July by conducting a fixed-rate JGB purchasing operation for 10Y at 0.110%. Through such a fixed-rate JGB purchasing operation, the BoJ purchases JGBs at specified yield levels ... those operations reconfirmed that quantity is no longer a policy tool but is an endogenous variable that is affected by how the BoJ controls the shape of the yield curve
  • Our view that the quantity of money is no longer a policy variable can also be seen from the fact that the pace of an increase in the balance of BoJ's JGB holdings has been slowing.

On #2 and #3, specifically the 'conventional' downward revisions to CPI ...

  • as the BoJ continuously revises down the core CPI outlook, the behaviour confirms the underlying deflationary mind among the economic agents (households and enterprises).
  • In other words, it is ironic that the downward revisions on core CPI outlook numbers have been making their deflationary mind more rigid.
  • Thus, there is a clear cost for the BoJ to continuously state that the CPI inflation rate will reach +2% YoY every single time the Bank releases inflation outlook numbers.

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Great stuff from CA