{LONGTERMINVESTORS} Fwd: Japan: Bank of Japan monetary policy- Another one bites the dust

---------- Forwarded message ----------
From: <research@icicibank.com>
Date: Fri, Jan 29, 2016 at 12:46 PM
Subject: Japan: Bank of Japan monetary policy- Another one bites the dust
To: stockdesai@gmail.com

Japan Bank of Japan in a surprise move introduced negative interest rates on excess reserves but QE program was left unchanged The objective for the Bank remains that of achieving the 2% inflation target as soon as possible Given the latest round of additional easing and the prospects of further widening of rate differentials between US and Japan we believe the Yen will continue to weaken over the course of this year Bank of Japan finally capitulates In what was a surprise decision the BoJ cut its interest rate paid on excess reserves to -0.1%. While, extending monetary accommodation was not wholly unexpected but the mode was surprising as the BoJ Governor until very recently had been emphatic about ruling out negative interest rates. The decision was not unanimous and passed with a 5-4 vote. The BoJ had cited concerns earlier about the fact that banks may be less willing to trade JGBs if rate on excess reserves is negative. This is significant as financial institutions in Japan hold ~90% of outstanding JGBs and this trend would undermine the ongoing QE program. Also there would be profitability concerns for the banking sector thereby casting doubt about the objective of boosting lending to the economy. However, contrary to expectations it has crossed the Rubicon into negative territory for rates instead of boosting its asset purchase program. Here we also note the fact that the BoJ bond buying program risks becoming increasingly distortionary given that it has now become the dominant buyer in some tenors. We believe that the BoJ judged that the current global backdrop was such that it posed risks to Japanese recovery and especially the inflation trajectory which has stubbornly refused to improve. Hence on balance they decided to follow suit a la ECB and adopt negative rates. BoJ adopts a 3 tier system of rates for excess reserves The Bank will adopt a three tier system where each financial institution's current account balance at the BoJ will be divided into 3 tiers and 0.1%, 0 and -0.1% will be applied to each tier respectively. (For details please refer to appendix). The asset purchase program has been left unchanged at the rate of an annual accretion to monetary base of JPY 80 tn. The rate of annual purchase in JGBs is also such that the outstanding increases by JPY 80 tn. The objective remains to lower the front end of the curve significantly so as to better facilitate portfolio rebalancing. State of the Japanese economy The economy has just escaped a brush with recession recently and there has been moderate recovery in household and corporate sectors with business confidence indicators such as the Tankan survey showing cautious optimism. CPI however continues to languish and the December print was 0.2% YoY. The BoJ felt that uncertainties about oil prices and China may destabilise recovery in Japan and hence monetary policy was bolstered. Yen to continue to depreciate The Japanese Yen is trading weaker against the Dollar after the policy action. Given monetary policy stance, Yen's appeal as funding currency and widening interest rate differential with the US on divergence in monetary policy we believe the Yen should continue to depreciate against the Dollar in the medium term to ~128-130 by end 2016. However, it being a safe haven, short term plays would have to be tactical as significant repatriation into Japanese assets happen during times of elevated global risk aversion. Please refer to the attached document for a detailed report. Regards, ICICI Bank : Treasury Research Contact: Kamalika Das +91 22 4008-6280 kamalika.das@icicibank.com ​

--

CA. Rajesh Desai

--
You received this message because you are subscribed to the Google Groups "LONGTERMINVESTORSRESEARCH" group.
To unsubscribe from this group and stop receiving emails from it, send an email to longterminvestorsresearch+unsubscribe@googlegroups.com.
Visit this group at https://groups.google.com/group/longterminvestorsresearch.
For more options, visit https://groups.google.com/d/optout.