BoJ retains -0.1% policy rate and 0.0% 10Y JGB target

Chris Scicluna

US Treasury yields hit new highs as investors read between Fed’s lines
After largely buying into the Fed’s dovish policy rhetoric on Wednesday, yesterday investors seemingly concluded that the substantial upward revision to the Fed’s growth outlook and Chair Powell’s obvious lack of discomfort with higher bond yields warranted a further sell-off in the Treasury market. The 10Y UST leapt as much as 10bps to a new intraday high of 1.75%, before retracing to 1.71% as Wall Street closed – a move that was driven by a rise in the real yield to the highest level since last June. Unsurprisingly, the sell-off in the bond market weighed heavily on equities, with the S&P500 closing down 1.5% and the tech-heavy Nasdaq baring the greatest brunt with a 3.0% loss. The rise in Treasury yields did provide support to the greenback, however, which largely erased its post-FOMC losses against most currencies.

Against that background, it was always going to be a difficult day for most Asian investors, which today also had to absorb the outcome of the BoJ’s policy review. In summary – we discuss the review more below – the BoJ announced relatively minor tweaks to how it will conduct policy and none that were hugely surprising, especially in light of yesterday’s Nikkei newspaper report. The announcement with greatest impact – which saw the TOPIX close up 0.2% today, even as the Nikkei225 fell 1.4% – was the BoJ’s decision that henceforth it will restrict its ETF purchases to those that track the TOPIX. After some initial volatility, the 10Y JGB yield returned to just under 0.12% – about where it closed yesterday – and the yen was similarly unmoved by the BoJ’s policy tweaks, which also included a scheme to mitigate the impact on banks’ profitability if the BoJ was ever to feel the need to nudge the policy interest rate lower.

Elsewhere in Asia, in China the CSI300 has slumped 2.8%. There were no Chinese data today but the first of a series of much-awaited meetings between US and Chinese officials generated a number of headlines at the outset that probably didn’t help market sentiment. A tense introduction saw US Secretary of State Antony Blinken criticise China’s treatment of Muslim minorities in Xinjiang, its approach to Hong Kong and Taiwan and its role in cyber-attacks. China’s Yang Jiechi fired back, amongst other things criticising the US’ own record on human rights and pointing out that the US didn’t speak for the globe. Foreign Minister Wang Yi also criticised Blinken’s opening remarks, adding that “The United States isn’t qualified to speak to China from a position of strength”. Needless to say, low expectations for a thawing of relations at these meetings – which will continue today – were validated by this opening exchange.

Aside from a 2.2% decline in Hong Kong and a 1.3% decline in Taiwan, other regional bourses generally recorded modest declines of about ½%. In the Antipodes, the ASX200 has declined 0.6%, mostly responding to an overnight fall in energy prices. But pressured by the further sell-off in USTs, the 10Y AGCB opened 8bps higher at 1.86% before slipping back to 1.80% following a disappointing retail sales report.

BoJ makes modest tweaks to policy operation, announces an “Interest Scheme to Promote Lending” to allow it to cut interest rates further if needed
Today’s conclusion to the BoJ’s March Board meeting held greater interest that usual with the Bank announcing the outcome of its review of monetary policy – one that was never likely to usher in substantial changes given that it had already expressed satisfaction with the broad “QQE with Yield Curve Control” framework (reiterated again in today’s post-meeting statement). Judging by the reaction of financial markets, investors consider today’s changes to be largely as anticipated, especially in light of recent pre-meeting media reports. In summary, the key changes announced today were a slight widening of the permitted trading band for the 10Y JGB, the removal of a fixed target for ETF and J-REIT purchases – with ETF purchases restricted to those that track the TOPIX – and a new scheme that would mitigate the impact on financial institutions’ profitability if the BoJ ever felt the need to cut the policy rate further. Overall, therefore, a very modest package of tweaks to the policy framework that will have little impact on the economic outlook. In the detail:

  • As widely expected, despite a difficult quarter for the economy due to the impact of the winter surge in coronavirus cases, the BoJ’s key interest rate settings – its short-term policy rate of -0.1% and its 10Y JGB yield target of around 0% – were left unchanged by 8-1 vote, with only external member Kataoka continuing his long-running call for further easing. Also unchanged was the Bank’s commitment to purchase an unlimited amount of JGBs as required to hit its 10Y yield target.
  • As suggested yesterday in a Nikkei newspaper article – and contrary to Governor Kuroda’s earlier comments – the Bank announced that the permissible trading range for the 10Y JGB would be widened very slightly to an explicit ±25bps from the soft ±20bps range communicated previously. The Bank indicated that when yields fall below that range temporarily, it would not respond strictly. However, should interest rates rise significantly, the Bank announced that it would introduce “fixed-rate purchase operations for consecutive days”, purchasing an unlimited amount of JGBs to set an upper limit on interest rates when necessary. (Of course, the BoJ already had an unlimited fixed-rate purchase operations facility at its disposal). As usual, the Bank’s forward guidance continues to indicate that it expects short- and long-term policy rates to remain at current levels or lower, and it will not hesitate to take additional easing measures if these are viewed as necessary.
  • Regarding the BoJ’s other asset purchases, the upper limit for purchases of ETFs (about ¥12trn) and J-REITS (about ¥180bn) was left unchanged, with the Bank today announcing that these upper limits – introduced as part of the Bank’s pandemic response – will continue to apply even after the pandemic subsides. But within these upper limits, as widely expected, there is no longer any mention of an explicit target for purchases, which instead will occur “as necessary”. This brings these purchases into line with how the Bank has been conducting its rinban operations. The Bank also announced that henceforth it would only purchase ETFs that track the TOPIX, rather than including those that track the Nikkei225. Meanwhile, the Bank maintained its commitment to purchase CP and corporate bonds with an upper limit of ¥20bn in total until the end of September (as previously, the split will be determined by market conditions).
  • The other main innovation today was the announcement of a new “Interest Scheme to Promote Lending”. The aim is to mitigate the impact on financial institutions’ profitability should the BoJ feel the need to cut interest rates further (and clearly also to convince investors that further policy rate easing is now a viable option). In particular, in the event that the short-term interest rate was cut, financial institutions would be offered an increased interest rate incentive, applied to a certain amount of their current account balances, when the BoJ makes funds available against their loans under its various fund provision measures (including the Special Funds-Supplying Operations to Facilitate Financing in Response to COVID-19). The incentives are grouped into three categories, with the middle category – applying to BoJ’s pandemic-driven program to support the financing of firms, where funds are provided against private debt pledged as collateral – attracting an interest rate that is equal to the absolute value of the short-term policy interest rate target (so 0.1% at present, but rising to 0.2% if the BoJ were to cut its policy rate to -0.2%). A slightly higher incentive applies where pandemic-related funds are provided against loans made by financial institutions on their own and a slightly lower rate applies to funds provided through the Loan Support Program and the Funds-Supplying Operation to Support Financial Institutions in Disaster Areas.
  • The BoJ also announced that it would tweak the arrangements for tiering on its deposit facility, including by reallocating among financial institutions the amounts of the so-called Macro Add-on Balances that exempt a certain share of deposits from the negative rate. That measure aims to encourage greater arbitrage activity among banks and thus reduce the total share of bank deposits exempt from the negative policy rate. The BoJ also clarified how the deposit facility would work if the policy rate was cut further into negative territory.

Turning to the economic commentary, the BoJ stated that the economy had “picked up as a trend”, while noting that the situation remained “severe” due to the impact of the pandemic. The Bank noted that exports and IP have continued to increase and drew some comfort from a recent improvement in corporate profits, business investment and business sentiment. The employment and income situation was described as remaining “weak” – probably more true for the latter as the labour market has actually been quite resilient – while the Bank also noted a pause in household consumption due to the winter surge in coronavirus cases. Looking ahead, the Bank continues to expect only a “moderate” improving trend, with the economy supported by an expected improvement in external demand, accommodative financial conditions and government support measures. So while the Bank’s forecast measure of core inflation (CPI ex fresh food) is expected to remain negative for the time being, thereafter it is expected to turn positive and then increase gradually.

Japan’s national CPI for February provides no surprises, with core inflation barely positive
Turning to the latest Japanese data, as usual the national CPI report for February conformed closely with the indications from last month’s release of advance data for the Tokyo area, so that all the major aggregate printed exactly in line with market expectations. So after the suspension of the Government’s ‘Go-to-Travel’ subsidy programme had led to a significant pick-up in the various CPI inflation measures in January, the trend resumed in February with at best fractional growth in prices amongst the key aggregates, and no growth in the core aggregates that the BoJ cares most about. The headline CPI index increased a seasonally-adjusted 0.1%M/M, which given base effects was sufficient to cause annual inflation to increase 0.2ppts to a 4-month high of -0.4%Y/Y. After rebounding sharply in January, prices for fresh food declined 2.5%M/M and so were unchanged from a year earlier. However, the measure of core inflation forecast by the BoJ in its quarterly Outlook Report – which excludes fresh food – also increased 0.1%M/M so that annual inflation increased 0.2ppts to -0.4%Y/Y.

Elsewhere in the CPI, higher prices for fuel drove an overall 0.9%M/M lift in energy prices causing the annual decline to moderate to 7.2%Y/Y. Therefore, the BoJ’s preferred measure of core prices – which excludes both fresh food and energy – was unchanged during the month, although base effects meant that annual inflation nudged up to a 7-month high of 0.2%Y/Y. The narrower measure of core prices used overseas – which excludes all food and energy – was also unchanged in the month, with annual inflation also nudging up 0.1ppts to 0.3%Y/Y. Goods prices fell 0.8%Y/Y in February, continued to be weighed down fuel prices. Non-energy industrial product prices increased 0.7%Y/Y for a third consecutive month. Sadly for the BoJ, services prices were unchanged in February and for a second month also unchanged from a year earlier.

Aussie retail sales decline in February on restrictions in Victoria and Western Australia
Following yesterday’s bumper employment report, today the ABS released preliminary estimates of retail spending for February. Despite strong job growth, retail spending fell an unexpected 1.1%M/M following downwardly-revised growth of 0.3%M/M in January. According to the ABS, this outcome was driven by large declines in spending in the states of Victoria and Western Australia, which had lockdown restrictions in place for a portion of the month. By contrast, spending increased in New South Wales and Queensland, which had been impacted by brief restrictions in January. Even with the decline in February, retail spending was up a sturdy 8.7%Y/Y. However, even assuming a rebound in March, spending appears to be on track for at best a flat outcome in Q1. Fortunately, as was the case last quarter, non-retail consumer spending is likely to be faring somewhat better as normal spending patterns are gradually re-established.

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