Monetary policy alert:The BOJ disappoints again

Even though the BOJ is constrained by the limited additional monetary policyeasing options available, we believe the BOJ’s announcement today was stilldisappointing. No change was made to either the ￥80tr pa JGB buying program(we expected none), nor the NIRP, Negative Interest Rate Policy: we expected amove to -30bp from the current -10bp.

It is six months since the BOJ introduced the NIRP at -10bp on just a sliver of thebanking industry’s excess reserves. By way of comparison, the ECB ‘pays’ -40bpon all excess reserves held with them.

The BOJ did increase its equity ETF purchase program, to ￥6tr per yearfrom ￥3.3tr. This will have virtually no impact on either inflationary expectationsor economic growth.

The BOJ also provided two potential positives: 1) it demonstrated itsconfidence in the ongoing fiscal changes (the delayed consumption tax rateincrease, the government’s upcoming supplementary budget), and revised up itsFY3/18 real GDP forecast to 1.3% from 0.1%, 2) it announced a “comprehensiveassessment” of the QQE + NIRP monetary framework, to be presented at itsnext policy meeting, 20-21 September 2016. This could involve a transition frommonetary base targeting to targeting the rate of IOER (interest on excessreserves), and a schedule for the tapering of the JGB bond purchase program.

We are now forecasting the BOJ moving its rate of IOER ‘paid’ on Tier Threecurrent balances from the current -0.1% to -0.2% on 21 September 2016, and to-0.3% on 20 December 2016.

Fiscal policy: The Nikkei 29 July 2016 indicated that the supplementary budgetannouncement expected next Tuesday will have a headline of ￥28tr and onbudgetcash expenditures of ￥6tr. We believe the latter will include ￥2tr in thecurrent fiscal year. The government is maintaining its commitment to a primaryfiscal surplus in FY2020 (3/2021). We would regard such an announcement asconventional and moderately supportive to growth.

Our key take-away: We believe the government’s revealed policy prioritiesremain 1) corporate revitalisation, 2) fiscal reconstruction, 3) monetary reflation.

Please see from page 7 for more details. Stabilizing the public debt to GDP ratiovia financial repression has led Japan into a slow growth trap, in our opinion. Wehave been forecasting a trend appreciation in the Yen, but the move has beenmuch stronger than expected. Pages 10-15 have more on the Yen.