The much awaited, but much misunderstood BoJ meeting passed today. Like many Central Bank meetings (and indeed many Central Banks), these events are difficult to read precisely. And this no exception.
The BoJ has managed to disappoint the full spectrum of market participants – from those that expected a clear reversal of policy, to those that expected no change. But what did they do, and what are they trying to achieve?
What they actually said they did.
My friends in the markets had this assessment, with which I agree.
* On 10y yields – they say they will “be more flexible” on their purchases
* On ETFs – they’ve added a bit more bias to the TPX index from the NKY as expected. However they also note the ETF purchases may see increases/decreases in purchasing amount depending on the premium priced into asset prices. So Y6tn would seem not to be a guaranteed amount.
* On short rates, they have somewhat eased the pain on those excess IOER deposits being charged -0.10%. Reducing the balance from Y10tn being charged -0.10% to just Y5tn. A financial/banking sector positive.
*The additional wording included, comprises of a new forward guidance comment saying they will seek to maintain current low short & long end yields through the uncertainty of the upcoming consumption tax hike scheduled for Oct 2019.
What Kuroda told you in the press conference.
Well he said a lot, but if there was one clear important comment that I believe the market will focus on, its his vision that “you could see 20bp 10yr JGB yield”.
Is that a bad thing? Will the sky fall? Or the world end? Personally, I doubt it.
It will have an impact on US Treasury yields, perhaps pushing 10yrs back to 3.10%-3.15%-ish. But more? No.
Indeed the BoJ went as far as they could to reassure markets that their policy will sustain the capital outflows into global markets so crucial to financial order.
Financial (especially global) instability will not be allowed.
But with a slightly steeper yield to help banks.
Did they tweak?
Some hedge fund managers think the BOJ did tweak, and that it’s significant. While needing to manage the process to prevent a taper tantrum, at the end of the day they now have given the market more flexibility and their tapering process will accelerate further post the September elections.
That could be true. But just as likely, they could be introducing market flexibility by allowing the 10yr yield some volatility around the current “target” of around 10bps. More chopped-up trader capital, but little else.
Or did they twerk?
The plain fact is, in order to build a strong and durable monetary policy, the BoJ have had to target practically anything that moves – short rates, the yield curve (and with it the bond market), capital outflows, even stock markets. So far the only type of liquidity they haven’t targeted with their policy is that produced by rain clouds – but don’t give them ideas.
With their success has come the obvious side effect – they have boxed themselves in so tight, they have virtually no room for manoeuvre.
If they talk too tough, they could upset global capital markets – a tantrum that makes the 2013 Fed version look like kindergarten.
If they do nothing at all, they run the risk that markets grow fearful they’re both behind the curve and unable to do anything about it.
This is precisely the reason I believe they “twerked” – they’re shaking it….
The beginning of the beginning of the end of the end?
We think they’re trying to achieve the perfect start to a major policy reassessment. A path to a place where they do not own most of the markets, and where they have flexibility to implement both tighter, and crucially easier policy, if they wanted.
But, in the words of the immortal Irishman when asked “how do you get to Tipperary?” , he replied “dunno, but I wudna’ start from here”.
All the Central Banks regret their current starting points. And the fully-20:20 visioned market pundits have been reminding them of this fact regularly.
But none have given a clear vision of how to get to that Nirvana of policy flexibility.
So it’s little surprise, that the BoJ today started cautiously awakening markets to their need to begin to begin the process.
To my mind, they did NOT actually begin that process today.
The overall stance was “easier for longer”, with a hint towards an end date, potentially around the time of the long awaited Consumption Tax (CT) hike.
But that of itself, lends caution. Imagine that we get there, only to find the CT hike upsets markets, fearing too early a fiscal tightening, and the BoJ is forced to reverse their intent. Maybe even ease again.
The end of the end (of easier monetary policy) will have arrived.
Will they look twerps ? No.
I – like many who have seen markets through more than one full cycle – recall with some melancholy, how Japanese markets have proved a graveyard for many a smart and capitalized trader.
Has this really changed? As an astute guy remarked to me today, “… I’ve been shocked at how small funds over the years thought they had the firepower to play chicken with a Central Bank whose balance sheet dwarfs the GDP of most countries on Earth, so maybe he’ll hammer 10s down again just to show them who’s in charge.”
I think that’s the way, at least for the next few days, to view the BoJ.
Caveat Emptor (and short seller) as always.