This week there have been two major events which investors ranked as among the most important in September. It was a given that the US Fed’s FOMC meeting would command attention but the Bank of Japan meeting was also front and centre, not only because the Japanese economy and financial markets are among the largest in the world but because the Japanese central bank’s policies are reaching some limits.
For some time now, the BoJ has been buying assets from the private sector in the hope the extra cash in the economy would promote private sector spending and investment. Japanese Government bonds (JGBs), exchange traded funds (ETFs) and Japanese real estate investment trusts (JREITs) have been purchased in vast quantities and now the BoJ not only owns about 30% of all government debt but it also a substantial shareholder in many companies via its holding in Japanese equity ETFs.
The BoJ has announced a change in its policy at its meeting this week. There is no new stimulus package as some had expected but it now aims to control the yield curve slope, by keeping the “policy” rate at -0.10% and the yield on 10 year JGBs at around zero. Longer term bond yields will be allowed to rise in an acknowledgement low yields on long term JGBs are hurting insurance companies which are the major investors in these bonds. Westpac’s Robert Rennie says the new yield control policy “means by definition that the JGB asset purchase program can no longer be a hard target – some months they will buy a lot; some months they will not.” Currently it is spending about 80 trillion yen a year (AUD$1.03 trillion) on JGB purchases and it expects this will be enough to implement its “new” approach, not counting the funds used to by ETFs and JREITs.
CBA Global Market Research says the change was likely given the dwindling amount of bonds available for the BoJ to buy. ”The important point is that the BoJ was going to bump up against physical limits in JGB buying, so to focus on yield, not just quantity, gives the BoJ greater flexibility in either direction. The BoJ can buy less (or potentially sell) to guide yields higher. And on the flip side, ramp up purchases on any unforeseen rout on JGBs to force yields back down.”
10 year JGB bond yields initially rose after the announcement and even went briefly into positive territory but settled back to -0.035% by the end of the day.