New Bank of Japan (BoJ) Governor Haruhiko Kuroda held nothing back, much to the global currency market’s surprise, by kicking off his inaugural two-year term with an aggressive new easing program designed to combat more than 15 years of deflation in the world’s third-largest economy.
The key measures of the BoJ’s “Quantitative and Qualitative Monetary Easing” program include a doubling of bond purchases to 7-trillion yen (US$75b) a month and an expansion of purchases of other assets, including exchange traded funds and real-estate investment trusts. The central bank will end up buying more that +70% of newly issued debt – thereby removing a lot of supply from the market.
The pledge of aggressive buying has caused Japanese Government Bonds (JGB) to rally violently and flatten their yield curve. Surprisingly, the BoJ will buy JGBs up to a maturity of 40 years. The market had only been expecting the central bank to extend out to either the five- or 10-year bucket. Yields on 10-year JGBs have since hit a new record low of +0.425%. Low Japanese yields should push domestic investment funds to seek better returns farther afield with U.S. Treasuries the most likely destination.
Governor Kuroda’s strategy has caused the yen to plummet to 96.20 against the American dollar from 92.90 overnight — a clear signal that the BoJ’s initial moves have indeed lived up to market expectations. The decision to switch the policy target to base money from the overnight call rate is considered “unexpectedly bold” – thus they finally mean business. Governor Kuroda has pledged to achieve a +2% inflation target in about two years, while vowing to adjust monetary policy further if needed.
Credit when due: the BoJ has cleared its first hurdle. Now we have to wait and see if these new measures are capable of pulling the Japanese economy out of the economic doldrums. Meanwhile, concerns have risen this week about U.S. economic growth momentum. The market is now worried that tomorrow’s nonfarm payroll report release will come in much weaker than expected (+200K) following the disappointing ADP National Employment Report and today’s weekly jobless claims release. A poor U.S. jobs report will certainly knock the BoJ dollar-yen fueled rally violently and quickly.
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