Many market analysts think the Bank of Japan will convene an emergency policy meeting in response to the potential fallout if British voters decide Thursday in favor of leaving the European Union.
“We are always prepared to engage in additional monetary easing, but I will offer no comment regarding an unscheduled meeting,” BOJ Gov. Haruhiko Kuroda said June 16.
A decision for a British exit, or Brexit, from the EU may push the Japanese currency below 100 yen to the dollar, several observers say. If that happens, the BOJ likely “won’t wait for the regular meeting scheduled for July 28-29 and will opt to open a special meeting,” said Kyohei Morita at Barclays Securities Japan.
Central banks in Japan and the West already have settled on a framework for supplying markets with a massive infusion of dollar-denominated funds if warranted, making a special BOJ meeting unnecessary. But the BOJ should proceed with such a meeting in order to “send a strong message,” said Yuji Saito of Credit Agricole.
The Bank of Japan’s holdings of Japanese government bonds have reached a third of the outstanding balance, resulting from large-scale purchases under its monetary easing program.
The central bank held 364 trillion yen ($3.49 trillion) in JGBs as of March 31, up 32.7% from a year earlier, according to preliminary flow of funds data for the January-March quarter released Friday. This accounts for a record 33.9% of all JGBs.
The BOJ held 13% of the total as of March 31, 2013, before it engaged in aggressive monetary easing under Gov. Haruhiko Kuroda the following month.
The percentage appears to have grown further, considering BOJ figures show holdings have risen to 373 trillion yen as of June 10. The central bank will own half of all JGBs sometime in 2018, predicts Hidenori Suezawa of SMBC Nikko Securities.
The BOJ’s purchases and its negative interest rate policy have caused JGB yields to fall, pushing the yield on newly issued 10-year bonds into negative territory. And with concerns over the U.K. leaving the European Union spurring investors to seek the safety of JGBs, the yield on 40-year instruments touched a record-low 0.195% on Friday.
The Bank of Japan has again stood pat on monetary policy, as expected, electing to maintain its negative interest rate at the level introduced in January and hold its quantitative and qualitative easing programme steady ahead of the UK’s EU referendum next week and a day after the Fed also elected to keep rates on hold.
The deposit rate was held steady at minus 0.1 per cent while the annual pace of its asset purchase programme remained at ¥80tn.
The yen strengthened as much as 0.7 per cent to ¥104.53.
Economists had expected the Bank of Japan to leave interest rates unchanged ahead of upper house elections on July 10. The BoJ did not rule out further easing, saying it would take additional measures if they are judged necessary for achieving its price stability target.
The bank also acknowledged inflation expectations – which it considers a key determinant of real inflation – have recently weakened, but maintained Japan’s economy “is likely to be on a moderate expanding trend.”
In January the BoJ adopted negative interest rates, its first benchmark rate move for five years, in a bid to stimulate economic growth by spurring banks to lend more actively.
Japan’s gross domestic product grew at an annualized pace of 1.9 per cent in the first three months of this year, in line with economists’ expectations but revised higher from an initial estimate of 1.7 per cent. But on June 1 Prime Minister Shinzo Abe announced he was delaying a rise in consumption tax to 2019 on fears it could undermine domestic demand.
Risk-averse investors are surging into Japan’s bond market as the U.K. prepares for a referendum on European Union membership, pushing yields to record lows and possibly forcing the Bank of Japan to delay bond-buying operations as a way to tamp down turbulence later on.
The central bank on Tuesday surprised many market watchers by forgoing open-market bond-buying operations. This and similar recent decisions will likely make for a tight purchase schedule in the latter half of the month. Many see this as the bank preserving policy firepower to respond to market turmoil on and after June 23, when the Brexit vote will occur.
A surge of demand after the market opening sent yields on benchmark 10-year Japanese government bonds to a record-low minus 0.17% during morning trading. Yields on 20- and 30-year JGBs fell to record lows as well, but rebounded slightly when it became clear after 10 a.m. that the BOJ would not hold open-market operations. Yields on five and 40-year securities also hit their lowest-ever levels during the day.
The central bank plans to hold operations on about 10 days during June, according to a policy plan released at the end of May. Only four days of operations had been conducted as of Tuesday. Filling the remaining six or so slots could take almost every weekday for the rest of the month when the BOJ is not meeting on monetary policy and the Finance Ministry is not auctioning bonds.
A majority of market watchers expect the Bank of Japan to take additional easing measures either in June or July, a QUICK survey Monday showed.
When asked about the BOJ’s monetary policy for the rest of 2016, 34% of the 175 respondents said they expect additional easing in July, while another 23% predicted even earlier action in June. This was the most answered question in the survey.
Some 47% supported the government’s decision to postpone a planned consumption tax hike, while 37% disapproved. The move drew 68% approval among stock players. But the majority of those in the bond and foreign exchange markets were critical, with only 30% favoring the delay.
The respondents also were divided in their assessment of Abenomics. Those in stocks on average rated the economic policies a 62 out of 100, with 60 being a passing mark. But bond market watchers gave a score of just 49, while foreign exchange players rated them a 56.
The Bank of Japan likely set aside funds for the first time to prepare for losses on its huge holdings of Japanese government bonds should the central bank end its monetary easing policy in the future.
The bank is thought to have reserved about 450 billion yen ($4.07 billion) for the year ended in March. The amount will become known when the BOJ releases financial statements as early as next week.
The BOJ created a framework last fiscal year that permits it to set aside part of the interest income from its JGB holdings, which have ballooned through the bank’s massive monetary easing program. Interest income likely grew about 30% from the prior year to around 1.3 trillion yen in fiscal 2015.
Though BOJ Gov. Haruhiko Kuroda has indicated that the bank could expand easing if it faces difficulty achieving its inflation target, the creation of the reserves is a move to prepare for an exit from monetary easing.
The central bank’s JGB holdings totaled 349 trillion yen as of March 31, up about 180% in three years. Long-term interest rates, currently in negative territory, will rise and bond prices will fall should the BOJ end its monetary easing once it is sure that Japan is finally breaking free of deflation. The bank estimates that a 1 percentage-point rise in long-term rates lowers the value of its JGB holdings by 21 trillion yen.
Bank of Japan Governor Haruhiko Kuroda likes to keep markets guessing by saying one thing and doing another, but, when it comes to ruling out “helicopter money” to reanimate the economy, officials and close associates say he almost certainly means it.
Despite monetary easing on an unprecedented scale over the past three years, data on Wednesday is likely to show Japan’s economy barely grew in the first quarter.
Fears policy makers are out of ammunition has led a growing number of overseas investors to speculate the BOJ might resort to helicopter money – an untested policy in which a central bank permanently expands the money supply that Nobel laureate Milton Friedman likened in 1969 to dropping cash from a chopper.
In practice, such a policy could mean the BOJ printing money to buy debt direct from the government, which would then inject it into the economy through public spending, or accepting perpetual bonds to fund fiscal spending indefinitely.
The BOJ is already helping finance Japan’s huge public debt cheaply by gobbling up government bonds at an annual pace of 80 trillion yen ($737 billion), more than double the amount newly issued each year, but it is buying them in markets.
Some Bank of Japan policymakers stressed the need to expand monetary stimulus further if needed to hit their price target, a summary of opinions from discussions at the central bank’s April rate review showed on Thursday.
The summary also showed the BOJ’s decision to keep monetary policy steady at the April meeting was based on the predominant view in the board that the central bank should take more time to examine how its decision in January to adopt negative interest rates would affect the economy.
“When necessary, the BOJ should take additional steps because downside risks to the economy and prices are large,” one of the nine board members was quoted as saying at the April 27-28 meeting, a view echoed by several other members.
The BOJ held off from expanding stimulus at the meeting, defying market expectations for action even as soft global demand, an unwelcome rise in the yen, and weak consumption threatened to derail a fragile economic recovery.