BOJ Commitment Undeterred

Maxime Darmet, Associate Director in Fitch’s Economics team says the BOJ meeting has not brought any major changes to monetary policy but will reinforce policy sustainability to its JGB purchases. Kaori Nishizawa, Director in Fitch’s Financial Institutions team adds that the overall impact on banks’ profits is likely to be rather small.

Bank of Japan

Maxime Darmet

“Yesterday’s decisions will not change the monetary policy stance for at least the next two years, with the BOJ re-affirming its commitment to keep running its extremely accommodative policy until inflation picks up above 2% and stays there. We do not see the BOJ overshooting its inflation target in a durable manner, and the BOJ itself has lowered again its inflation forecast for the next three fiscal years.
However in yesterday’s meeting the BOJ introduced further flexibility in its monetary settings to strengthen the policy sustainability of its JGB purchases. The introduction of the yield curve control (YCC) policy in September 2016 — setting the JGB 10-yr yield as the main monetary policy goal — has allowed the BOJ to scale back quite dramatically the actual pace of its JGB purchases, easing concerns about declining JGB market liquidity. Yesterday’s decision to add more flexibility at the margin on the 10-yr yield cap — stating that “the yields may move upward and downward to some extent” — gives the BOJ more leeway to engage in de facto tapering of asset purchases. However we think that the introduction of forward guidance on policy rates — keeping short term rates low for an extended period of time — is also a significant move as it provides another avenue for putting downward pressure on long-term yields.”

Kaori Nishizawa

Kaori Nishizawa, Director in Fitch’s Financial Institutions team adds that the overall impact on banks’ profits is likely to be rather small, in particular for the major and regional banks.

“The BOJ tried to address concerns on banks’ strained profitability by announcing that the negative interest rate will be applied on a smaller proportion of the financial institutions’ deposits at the Bank. However we expect the overall impact on banks’ profits to be not that significant. Less than 1% of the JPY11.5 trillion negative interest rate deposits at BOJ — which could reduce to around JPY5 trillion — are from major and regional banks, while 73% are from trust and custodial banks and the remainder from foreign banks, as per end-June data. Banks’ BOJ placements for which negative interest rates apply have hovered at 3%-5% of total deposits for the last two years, which compares with a high of 10% at end-March 2016. Fitch views that the low interest rate environment will continue to challenge the Japanese banks, exposing their low efficiency and highlighting the difficulties to address structural challenges.”