BoJ: Evaluating QQE with yield curve control – Nomura

Takashi Miwa, Research Analyst at Nomura, notes that the BOJ decided to introduce a new framework for monetary easing called quantitative and qualitative monetary easing with yield curve control at its monetary policy meeting of 20–21 September.

Key Quotes

“The main aspects of this framework are as follows: (1) introducing de facto yield curve control by targeting long-term interest rates as well as policy rates (short-term interest rates); and (2) making an inflation-overshooting commitment (enhanced forward guidance), committing itself to expanding the monetary base until the y-y increase in the consumer price index (CPI) exceeds the price stability target of 2% and stays above the target in a stable manner.

Does this represent enhanced monetary easing?

BOJ Governor Haruhiko Kuroda described these decisions as a framework for enhanced monetary easing at the regular press conference held on 21 September. However, the 10-year JGB yield target that that the BOJ has introduced as a new operating variable is broadly the same as current yields. The BOJ also looks to have essentially retained its policy rates and the quantitative and qualitative aspects of its policy mix. Whether these decisions can be described as enhanced monetary easing may therefore be open to question.

Effectively watering down quantitative aspect of policy in name of flexibility and sustainability

One argument that casts doubt on the assertion that the new framework represents enhanced monetary easing is that it effectively waters down the quantitative aspect of the BOJ's policies to date. While the BOJ has said that it remains committed to expanding the monetary base, keeping JGB purchases broadly at their current level of ¥80trn a year, its decision to shift the operating variable to long-term interest rates means that in reality there will be occasions where the pace of BOJ purchases and monetary base expansion is slower than it has been to date. Governor Kuroda himself said at the press conference that the bank’s new approach would enable it to respond more flexibly to economic conditions and make its policy more sustainable than under its old quantitative targets. In our view, the BOJ has effectively started to abandon the quantitative aspects of its policies in order to make them more flexible and more sustainable.

Future additional monetary easing likely to revolve around bringing down both long- and short-term interest rates

Assuming that this change in the framework means that the BOJ has effectively watered down the quantitative aspects of its policy mix to date, this implies that additional monetary easing in the future is likely to mainly revolve around bringing down the operating targets of policy rates and long-term interest rates. Potential triggers for additional easing include lower-than-expected inflation as a result of delayed rises in inflation expectations, as discussed in the comprehensive assessment, and instability on financial markets, and forex markets in particular, as a result of doubts about whether the decisions taken by the BOJ at its 20–21 September monetary policy meeting actually represent enhanced monetary easing.”