BoJ: Hold your horses - HSBC

Research Team at HSBC, notes that the BoJ officials kept the annual base money increase target of JPY80trn, left the marginal deposit rate unchanged at -0.1%, but raised their ETF purchases by JPY2.7trn.

Key Quotes

“A few extra goodies: the BoJ will establish a new facility to lend JGBs to banks and officials doubled the USD lending programme for overseas investment to USD24bn.

Importantly, the BoJ said it will review the effectiveness of its policies at its upcoming meeting on 21 September. This may raise hopes for something punchier. But we counsel caution: to us, July’s decision suggests that the BoJ has reached the limits of its current policy framework. A significant increase in JGB purchases is difficult given that the central bank, by its own admission, may run into trouble at some stage obtaining enough bonds to keep the programme going.

We still forecast a marginal increase by JPY10trn, now at the September meeting, but that may need to involve a widening of purchases to include FILP bonds (which would also neatly fit into the new fiscal stimulus programme).

Another cut in the marginal deposit rate also appears unlikely given the squeeze such a move would exert on banks' profits and risk appetite. The fact that the BoJ introduced a JGB lending programme suggests to us that the central bank now wants to cushion banks from the impact of a negative deposit rate. We now expect the marginal deposit rate to stay at -0.1% for the time being.

The BoJ, by contrast, has still some scope to increase ETF purchases, even if it is not entirely clear how the policy impacts inflation expectations and economic growth. We therefore forecast another JPY3trn increase in ETF buys in September.

The BoJ's relative inaction raises questions about its ability to ease further under the current monetary framework. This supports our call that USD-JPY will drift to 95 by year-end.”