What the Bank of Japan Can Do - BBH

What the Bank of Japan Can Do - BBH

27 April 2016, 19:19
Roberto Jacobs

What the Bank of Japan Can Do - BBH

According to analysts from Brown Brother Harriman, the Bank of Japan could cut the deposit rate further into negative territory and/or increase the assets it is currently buying or it could offer new types of credits.

Key Quotes:

“If the BOJ does not ease policy, the risk is renewed yen strength, a backing up of JGB yields and a sell-off in the Japanese equities.”

“Because of the G7/G20 agreement that makes intervention in the foreign exchange market difficult, monetary policy is all the more important.”

What can the BOJ do? There seems as if there are a fixed number of possibilities for what the BOJ calls Qualitative and Quantitative Easing with Negative Rates. In terms of quantitative easing, it can increase the assets it is buying from the current target of JPY80 trillion a year. If the government is considering a new long-dated bond issue, to fund recovery and reconstruction, it is yet another instrument the central bank can buy.”

“The BOJ can cut its deposit rate deeper into negative territory. It can increase the fraction of reserves at the BOJ that are assigned a negative interest rate. There has also been some suggestion that the BOJ can offer negative interest rate loans, as the ECB will under certain conditions.”

“In summary there are two big unknowns. What will the BOJ do and how will the markets respond? Given the BOJ's penchant for surprising the market and the counter-intuitive market response, one cannot have much confidence in the answer to either question.”


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