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BoJ: Increasing interest in exit policy - Nomura

Market interest in the possibility of the BOJ exiting its current policy is gradually rising, suggests Yujiro Goto, Research Analyst at Nomura.

Key Quotes

“Among the G4 central banks, the ECB has decided on another step towards normalisation, while the BoE raised its policy rate for the first time in 10 years. The BOJ is becoming a lone dove again as in 2005. In addition, Governor Kuroda’s comments on “reversal rate” are increasing market expectations of an earlier BOJ tightening, but we do not believe his comments suggest an immediate tightening.”  

At the same time, the JGB market remains stable. JGB yields have declined so far this week, even though the BOJ has been gradually reducing its JGB purchases. Implied volatility in JGB yields has also remained at a very low level. The October Nikkei Quick bond investor survey asked bond investors about the expected timing of the government’s announcement of a victory over deflation, and only 18% expect the announcement by end-H1 FY2018. A large majority of domestic investors do not expect a change in the government’s stance on deflation anytime soon. In fact, deputy chief cabinet secretary Nishimura said today that “we want the BOJ to continue its appropriate monetary policy (Bloomberg).” Theoretically, the BOJ’s policy should be independent from the government, but as the BOJ and the government issued a joint statement in 2013, the BOJ is unlikely to change its policy independently of the government. The BOJ leadership nomination is also approaching, and the BOJ may not want to irritate the government, as the Bank likely wants to avoid the appointment of a more radical candidate.” 

As the market pays more attention to the possibility of BOJ normalisation, policy makers’ comments will be important for JPY in the near term. There will be many BOJ board members’ speeches scheduled over the next two weeks (Deputy Governor Nakaso on 29 Nov, Deputy Governor Iwata and board member Harada on 30 Nov, and board member Masai on 6 Dec). Governor Kuroda may also speak on 7 December, before the press conference after the next meeting on 21 December. We judge market expectations on the BOJ exiting its current policy is premature, and BOJ officials’ comments should calm the FX market, while the JGB market is already calm.”

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