Bank of Japan did "tweak" but overall kept 10Y @ zero plus/minus....The changes: (Source: Bloomberg LLP)
1. The BOJ will apply negative interest rates on fewer bank reserves to cushion the impact on commercial lenders
2. Allow more movement in 10-year bond yields
3. Tweak its purchases in the stock market to minimize distortions
4. Introduced forward guidance
It kept its two major benchmarks -- the negative interest rate and 10-year yield target -- unchanged. (Which was 10% discounted) plus as Reuters write's it:
"The BOJ will purchase government bonds so 10-year yields remain at around zero percent. While doing so, the yields may move upward and downward to some extent mainly depending on economic and price developments," the central bank said in a statement announcing the policy decision. The central bank also said that it will conduct bond purchases in a "flexible manner" in meeting a loose pledge to increase its bond holdings by around 80 trillion yen per year.
ACTION:
John Hardy on USDJPY:
Recent reversal has neutralized rally for the moment but hasn't sufficiently rejected the rally to call lower yet, as 111.00 is first downside trigger (close below), but really the pivot zone extends to 110, with 61.8% Fibo, Ichimoku cloud etc.., i.e., below 110.00 needed to fully get new bear potential going. To upside, a rally needs to pull above 112.25-50 to swing focus back to upside.
Market reaction was mainly in the US Treasury market – Japan pension funds remains massive buyers of US Yield….
US Treausuries - +23/32 @ 143 11/32
TOPIX – which should benefit from allocation change in ETF buying pretty much unchanged…..
Ten Year JGB's came of the 10-12 bps high to 6 bps
This is Bloomberg summary below…..
(BN) Kuroda Pushes Through Changes to Stay the Course for Longer Haul
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Kuroda Pushes Through Changes to Stay the Course for Longer Haul
2018-07-31 05:34:55.627 GMT
By Yuko Takeo and Masahiro Hidaka
(Bloomberg) -- Bank of Japan Governor Haruhiko Kuroda pushed through changes to his radical easing program to increase its sustainability as the central bank prepares for a longer struggle to stoke inflation.
The BOJ will apply negative interest rates on fewer bank reserves to cushion the impact on commercial lenders, allow more movement in 10-year bond yields, tweak its purchases in the stock market to minimize distortions and introduced forward guidance.
It kept its two major benchmarks -- the negative interest rate and 10-year yield target -- unchanged.
The BOJ cut its inflation forecasts, indicating it's preparing for an even longer battle to generate 2 percent price gains, which will further widen the gap with global peers who are moving away from crisis-era policies. The headline of the BOJ's statement underscored the goal: "Strengthening the Framework for Continuous Powerful Monetary Easing."
Because of the side effects of its policies, the central bank has faced questions about how long it could keep them in place. Inflation remains less than halfway to the target after more than five years of extraordinary stimulus.
Markets Fluctuate
The yen fluctuated and bond yields were largely steady as markets digested the news. Speculation policy tweaks were afoot increased as traders awaited the announcement, which finally came at 1:03 pm in Tokyo -- the latest since the yield-curve control program was introduced in September 2016.
"The BOJ is now more engaged and prepared to fight a long- run battle against deflation or disinflation," said Shigeto Nagai, Head of Japan Economics at Oxford Economics.
The BOJ reiterated that it will continue to buy Japanese government bonds to keep the 10-year yield at its target of around zero percent, but added language stating that "while doing so, the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices."
It added forward guidance for policy rates in its statement, saying it intends to maintain the current extremely low levels of short- and long-term interest rates for an "extended period of time."
The BOJ said it will shift its purchases of exchange-traded funds further toward assets linked to the Topix equities index and away from those linked to the Nikkei 225 Stock Average, while keeping the overall size unchanged.
ETF purchases linked to the Topix will increase to 4.2 trillion yen, from 2.7 trillion yen. Some 1.5 trillion will be a mix of the Topix, Nikkei and JPX-Nikkei 400, down from 3 trillion yen previously. Another 300 billion yen is earmarked for firms that invest in "physical and human capital."
Inflation Outlook
The BOJ said it now sees core consumer prices rising 1.5 percent in the 2019 fiscal year, down from 1.8 percent. The BOJ also lowered its forecast for fiscal 2018 to 1.1 percent, down from 1.3 percent. For fiscal 2020, it predicted 1.6 percent, down from 1.8 percent.
The new forecasts show the BOJ's struggle to stoke inflation, while its peers in the U.S. and Europe normalize policy. The Federal Reserve last month raised interest rates for a sixth time in 18 months and set a steeper rate-hike trajectory, while the European Central Bank has plotted the end of its asset purchases this year.
"They tried their best to avoid the perception of tapering or normalization by introducing the forward guidance," said Nagai. "The guidance is vague but gives some assurance that the current easing measures will continued at least into fiscal 2020, after checking the side effects of the planned consumption tax hike."
Stay the Course
Kuroda has consistently emphasized the need to stay the course with stimulus. Following the new forecasts, he is certain to face questions about price momentum in his news conference later Tuesday. He said in June, when the BOJ also cut its current assessment of inflation, that the central bank would look more closely at the reasons inflation isn't picking up as expected.
Since starting yield-curve control in 2016, the BOJ has slowed the pace of its bond purchases considerably from its guideline for increasing its holdings by about 80 trillion yen
($720 billion) per year. It's now about to 44 trillion yen.
The BOJ released a detailed report on Tuesday analyzing why inflation hadn't risen as expected. It cited factors such as rising numbers of women and seniors entering the workplace, which has weighed on wages.
In fact, with inflation stalling, news reports in recent weeks said the central bank would prepare for a longer battle by debating ways to make stimulus more sustainable, including by mitigating the side effects.
Jittery Markets
The market reaction to those reports showed the risks the BOJ faces in taking any steps that might be interpreted as normalizing policy. Last week, reports of potential policy changes pushed up the 10-year yield to near a level seen as the upper limit of the BOJ's accepted range. This prompted the central bank to step in with offers of unlimited, fixed-rate purchases of government bonds.
The BOJ had previously downplayed the side effects of its policy, saying banks and markets were functioning at acceptable levels. It has insisted the yield-curve control program is highly sustainable, while pledging to closely monitor its side effects.
To contact the reporters on this story:
Yuko Takeo in Tokyo at ytakeo2@bloomberg.net; Masahiro Hidaka in Tokyo at mhidaka@bloomberg.net To contact the editors responsible for this story:
Brett Miller at bmiller30@bloomberg.net
Henry Hoenig
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