BOJ policy implications:The BOJ prepares to change horses

Event

The BOJ on 29 January 2016 introduced “Quantitative and Qualitative Easing(QQE) with a Negative Interest Rate”. A sliver of the banking industry’scurrent excess reserves held at the BOJ will no longer be paid 10bp, but couldreceive either 0bp or be charged 10bp. No other changes were made to theQQE program.

The announcement details are available at the two links below:

http://www.boj.or.jp/en/announcements/release_2016/k160129a.pdf

http://www.boj.or.jp/en/announcements/release_2016/k160129b.pdf

Impact

We believe that the changes announced today have important signallingimplications. Japan now joins the club of negative policy interest rates, whichincludes the Euro-zone at -30bp, Sweden at -35bp, Denmark at -65bp andSwitzerland at -75bp. The BOJ release stated: “It will cut the interest ratefurther into negative territory if judged as necessary”.

In contrast, the US Fed increased the interest paid on excess reserves to50bp last December.

The above has led us to reduce our 10-year JGB forecasts as follows: