BoJ: Tapering does not mean tightening - HSBC

The BoJ has effectively begun to taper JGB purchases, but this should not impair its ability to control the 10y JGB yield as the current framework is sustainable for the foreseeable future, and the loose monetary stance stays broadly unaffected, according to analysts at HSBC. Managing market expectations by maintaining the commitment to reforms and monetary easing is crucial, they further adds.

Key Quotes

“The jar is looking increasingly empty. The Bank of Japan, like Sesame Street’s cookie monster, has seemingly gobbled up most of the government bonds it can, in an effort to pull the economy out of deflation. The BoJ still owns about 40% of the market but, with many investors needing to maintain minimum holdings, the pool of bonds available for purchase by the central bank is fading fast. Does that put the BoJ’s aggressive monetary easing at risk? We do not think so.”

“What really matters now is the BoJ’s commitment to keep 10-year yields around 0%. Its intention to net-purchase around JPY80trn of JGBs annually is less important. In fact, the BoJ has already started to taper its purchases, with the pace falling to an annual rate of JPY44trn in July. However, amid declining liquidity and a diminishing stock of “for sale” bonds, a slower purchase pace does not impair the BoJ’s ability to keep the 10-year yield at around 0% (or wherever it chooses). It also does not meaningfully reduce the monetary impulse from the easing stance.”

“Market expectations will be critical. Any loss of confidence in the commitment to structural reforms and monetary policy would quickly render easing ineffective.”