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Bank of Japan Expects Gradual Recovery for the Japanese Economy

18 June 2020 By Mircea Vasiu

On Tuesday this week, Bank of Japan (BOJ) communicated its June monetary policy report – a particularly important announcement due to the challenges of the coronavirus pandemic crisis. While it kept the monetary policy unchanged, BOJ restated its willingness to do more to support the local economy, if there will be the case. 

BOJ did communicate something new this week though – it upgraded its support measures for corporate credit. Since the beginning of the coronavirus crisis, BOJ launched several programs to sustain the economy, such as support for corporate financing, ongoing ETFs purchases, and active assistance in stabilizing financial markets via unlimited JGB purchases and USD operations.

BOJ’s June Monetary Policy Decision – Details to Consider

Besides the interest rate level, traders are particularly interested to see how the BOJ view on the YCC (Yield Curve Control) and the asset-purchasing program changed. Any surprises found in either of the two main elements’ part of the monetary policy in Japan are enough to create massive volatility on the JPY pairs.

This June BOJ decided to leave both the short- and long-term policy interest rates unchanged. The bank will apply a negative -0.1% to current accounts held by financial institutions at the bank, while on the long-term policy interest rates, it will focus on the 10-year JGB (Japanese Government Bond) yield to remain around zero percent.

As for the asset-purchasing program, BOJ remains an active buyer of ETFs (Exchange Traded Funds) and J-REITs (Japanese Real Estate Investment Trusts) within the upper limit of JPY12 trillion for ETFs, and JPY180 billion for J-REITs respectively.

Coming back to the corporate bonds buying, BOJ announced that it will continue to do so until the end of March 2021, within the upper limit of JPY7.5 trillion. All in all, an ultra-easy monetary policy from Japan, with the specification that it stands ready to do more, should the YCC measures require it. For example, BOJ specified that in case of the rapid increase in the yields, it would quickly ramp-up its JGB asset purchases appropriately.

Summing up, BOJ balance sheet growth so far has been the result of a mix between ongoing USD supply operations, ETFs, and T-bill buying, as well as tailored COVID measures, to respond to the pandemic. JGBs purchases remain constant, but BOJ sits ready to intervene should the YCC policy require an increase in JGBs buying.