Impact of BoJ's QQE on yen rates

The BoJ will maintain its current quantitative and qualitative easing (QQE) policy at the Monetary Policy Meeting scheduled for 30 October. However, it is likely to lower its price and growth forecasts in the Outlook report to be released that day. 

The BoJ will carefully evaluate how the economic slowdown in China and other developing countries, as well as low oil prices, affect Japan's domestic economy and prices. Whether additional easing is implemented, the BoJ will probably keep purchasing a huge amount of JGBs for the time being, so the outlook that yields will basically trend downward is unchanged. 

However, concern is mounting that lower market liquidity could trigger a sudden upturn in volatility. JGB yields have recently been low and stable, but they could become unstable again depending on the BoJ's attitude or developments in overseas bond markets.

A breakdown of the central bank's JGB holdings is expected by remaining maturity. With the introduction of QQE in April 2013, JGB holdings with remaining maturities over three years increased markedly. 

Then the QQE expansion of October 2014 fueled a conspicuous increase in JGBs with remaining maturities over 10 years. At the same time, holdings of JGBs with remaining maturities up to one year have steadily increased. 

"The amount of the central bank's JGB holdings that will be redeemed within a year is rising, so even if the BoJ simply continues adding ¥80tn annually to its JGB holdings without additional easing, It will have to increase its JGB purchases on a gross basis", says Bank of America. 

At end-2014, the BoJ held about ¥30tn of JGBs with remaining maturities up to one year, but by end-September 2015, this amount increased to about ¥39tn. The BoJ will therefore have to raise its annual purchases from ¥110tn to ¥120tn. 


If JGB issuance is trimmed under the rubric of fiscal reform, reducing the net supply of JGBs, the BoJ will be pushed to increase its net purchases in the open market. That will tighten the supply-demand relationship even in the absence of additional easing. 

The QQE expansion of October 2014 has increased the need for JGB sellers compared to last year, so if no new sellers appear, the BoJ will face the risk of being unable to proceed with its planned purchases. 

"The BoJ's balance sheet is rapidly expanding, and if its inflation forecast becomes untenable, the BoJ will have to tread even more carefully in its monetary policy conduct", added Bank of America.