Bank of Japan fine tunes the QQE programme

As anticipated there were no changes to the QQE programme at the last meeting of the year. However, the BoJ fine-tuned the QQE programme with three changes: to purchase longer maturity bonds, to buy more ETFs that encourage investment, and to buy more J-REITs. These changes are small relatively to the existing QQE programme.

As expected the Bank of Japan (BoJ) kept it open-ended Quantitative and Qualitative Easing (QQE) programme unchanged. The monetary base will continue expand at an annual base of JPY 80tn (USD 650bn). However, the BoJ further enhanced the stimulus package with a few changes, which was stressed by governor Kuroda at the press conference to not being seen as additional easing. Japanese equities did not like the news and fell by 1.5% and the JPY gained vs the USD.

One of the changes announced today was to extend the average maturities of Japanese government bonds it buys to 7-12 years from 7-10 years. This move was to push down interest rates in the longer end, which could further encourage corporate investment. In addition, this showed that the BoJ is nowhere close to "tapering".

Another change was to establish a new program to purchase exchange-traded funds, which target companies that invest in "physical and human capital". This measure is set to address to long-standing concern that Japanese corporates do not invest enough domestically. However, the real impacts may not be impressive as the size of the new program (JPY 300bn annual purchase) is fairly small.

The third and last change today was to increase the maximum amount of real-estate investment trusts it can buy from 5% of each issue to 10%.

Apart from these three changes, the BoJ maintained the same cautiously optimistic views as in previous meetings that growth is on track to recover, with exports improving and business sentiment at favourable level. The revised GDP data supported Kuroda's optimistic view on growth. Instead of contracting by 0.8% annualised in Q3, the economy actually grew by 1%.

"We expect the modest growth to continue, so the BoJ faces no heavy pressure to ease for the sake of growth", says Nordea Bank.

Kuroda was still confident that the 2% inflation target would be achieved around October 2016 - March 2017, a fact that most analysts are sceptical about. However, with renewed downward pressure on the oil prices, he kept a cautious tone and said that "timing of reaching 2% could change with oil prices".