BoJ Monetary Policy: Impact on yen rates

The BoJ is expected to maintain the current QQE at its Monetary Policy Meeting on 6-7 August. While the focus shifts back to supply-demand in the JGB market, the BoJ may keep an eye on how the overseas environment, China's unclear economic outlook, the decline in oil prices, and the Greek situation, will affect Japan's economy and prices for some time in the future. Since the BoJ is likely to continue the current monetary policy, rates are still expected to basically follow a downward trend; however, a sharp rise in volatility is of increasing concern JGB yields are declining, but could be back to unstable territory depending on overseas markets.

According to JSDA's trading activity by investors for June, trust banks were net purchasers of super-long-term bonds again, and the amount of ¥338.2bn marked a big increase from May. Trust banks turned to net selling in September 2014 to conform to changes in the GPIF portfolio. The recent switch from selling back to purchasing suggests JGB selling by the GPIF is dying down. Also, net purchasing of coupon-bearing JGBs by foreign investors recovered to ¥412.3bn in June, from ¥76.2bn in May. City banks were net purchasers of only ¥36.9bn of coupon-bearing JGBs in June, but it was their largest net purchase in the year since June 2014. 

Furthermore, the banks were conspicuously large purchasers of super-long-term JGBs, extending their average maturities. We cannot find aggressive JGB buyers except the BoJ, but sellers seem to be fading at the same time. The BoJ's expansion of QQE in October 2014 means it will need more sellers of JGBs than there were last year, and if no new sellers show up there is a risk of the BoJ being unable to buy JGBs according to plan. 

On the other hand, although more than eight months have passed since the expansion of QQE, JGB yields are almost same levels as at the time (there were swings and roundabouts). If the nominal yields do not decline from here on, the BoJ may need to review the effect of the expansion of QQE. The BoJ will likely be forced into a more cautious monetary policy if prices do not rise in accordance with its outlook. 

At this stage, it will probably stick with its current QE formula, but if it does opt for additional easing, given it will be difficult for it to significantly increase the quantity of its JGB purchases and that any further declines in already low JGB yields would likely have limited impact, rather than pursue greater quantity the BoJ is more likely to strengthen qualitatively, such as by lengthening the maturities of the JGBs it purchases, increasing its ETF purchases, and buying new types of financial assets.