The Bank of Japan’s decision Tuesday to reduce the amounts of government bonds it buys as part of its quantitative easing efforts sent the yen and Japanese bond yields higher. But analysts warned investors not to get ahead of themselves, calling the move more of a technicality than a tapering.
The central bank cut its purchases of Japanese government bonds, known as JGBs, expiring within 10-25 years and those maturing in 25-40 years by ¥10 billion ($88.8 million) each. And based on the market reaction of a strengthening yen against the dollar /zigman2/quotes/210561789/realtime/sampled USDJPY +0.1358% and the euro /zigman2/quotes/210561215/realtime/sampled EURJPY -0.4900% , and higher Japanese yields /zigman2/quotes/211347248/realtime BX:TMBMKJP-10Y 0.00% , it might have looked like a tapering.
But economists and analysts played down the move.
While its formal target of bond purchases remained at ¥80 trillion, “operationally, the BOJ has changed tactics,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
The Bank of Japan in September 2016 revamped its efforts by introducing a plan to hold the yield on 10-year JGBs near 0%—a program known as yield-curve control. The shift required the central bank to buy fewer bonds, analysts said—a development analysts foresaw when yield-curve control was introduced.
“Rather than a new policy of covert tapering, the fewer JGB purchases, gross and net, is the consequence of the previous policy shift,” added Chandler. “That shift had signaled the move away from targeting the balance sheet itself to targeting interest rates. Therefore, we are reluctant to recognize that today marks some kind of shift in policy.”
That said, the central bank’s balance sheet size reduced in December, even as it was still buying new assets, which could mean that the BOJ didn’t reinvest its maturing proceeds.
One group of investors who could benefit from all this are JGB fund managers given the slight yield curve steepening.
But besides not being quite ready to follow into the Federal Reserve’s footsteps, the BOJ has another big reason not to taper: equities.
Japan’s Nikkei /zigman2/quotes/210597971/delayed JP:NIK +0.18% index has been on a winning streak, ending Tuesday up 0.6% at 23,849.99—a 26-year closing high. And Shinzo Abe, recently re-elected in a snap election last October, has asked his central bank to keep supporting the economy.
And continued quantitative easing is part of that. The Nikkei pulled back slightly on the misunderstood tapering news, underlining that cheap money is better for stocks.
The BOJ, which is understood to have the loosest monetary policy among its peer group, has been tipped to be one of the last to move on its QE stance. However, late last year, more and more comments on the risks of prolonged monetary easing stirred market expectations that the BOJ could possibly make a move in 2018.
“Although markets are clearly nervous about imminent asset purchase tapering, the information content of this change is not high as yields are close to the BOJ’s target,” said Adam Cole, chief currency strategist at RBC. “No formal announcement on reduced purchases is likely until Kuroda has either been reappointed or replaced as BOJ governor, which could be as late as April.”
Abe confirmed that no decision has been made yet, Cole added.