Thursday, December 17, 2015

Japan maintains QE target but expands ETF purchases

    Japan's central bank left its target for boosting the country's monetary base by an annual 80 trillion yen but launched additional measures aimed at stimulating corporate investments and to encourage a smoother decline in interest rates across the yield curve.
    The Bank of Japan (BOJ), which in October 2014 raised its target for asset purchases, known as quantitative easing, said it would purchase Exchange Traded Funds (ETFs) at an annual pace of about 300 billion on top of the current plan that calls for purchases of 3 trillion yen.
    "Under this new program, the Bank will purchase ETFs composed of stocks issued by firms that are proactively making investment in physical and human capital," the BOJ said, adding the program was approved by a vote of 6-3 by its board.
     The new purchases will start in April 2016 and help offset any market impact stemming from planned sales of stocks the BOJ had bought from banks in November 2002 to enhance their efforts to reduce shareholdings.
    In addition, the BOJ will add firms that are investing to its list of firms that are eligible for support and extend the application period for loan support programs.
    In order to "facilitate smooth implementation of Quantitative and Qualitative Monetary Easing (QQE), the BOJ said it would expand the eligible collateral that can be used to obtain credit, a move that addresses the fall in banks' collateral as they have been selling government bonds to the BOJ.
    In the future, the BOJ will accept collateral of foreign currency-denominated loans of deeds and also accept financial institutions' housing loans portfolio through a trust scheme.
    The BOJ will also extend the average maturity of the government bonds that it will purchase under QQE to about 7-1/2 years from the current 7-10 years, and increase the amount of each issue of Japanese real estate trust that it can buy to 10 percent of those issued from 5 percent.
    For 2016 the BOJ will purchase about 120 trillion yen of Japanese government bonds from about 110 trillion in 2015 due to an increase in the redemption of maturing bonds, the BOJ said.
    Otherwise, the BOJ said it still expects Japan's economy to "continue recovering moderately" - a phrase it has been using for months - and repeated that inflation expectations appear to be rising although some indicators have show relatively weak developments.
    Japan's consumer price inflation was only 0.3 percent in October, up from zero in September, and core inflation, which excludes fresh food, was minus 0.1 percent for the third month running.
    Japan narrowly avoided falling back in recession when third quarter Gross Domestic Product was revised up to a 0.3 percent rise from the second quarter's 0.1 percent contraction after initial estimates had called for a 0.2 percent shrinkage.
    In annual terms, third quarter GDP grew by 1.6 percent, up from 0.7 percent in the second quarter.
    Unemployment fell by more-than-expected to 3.1 percent in November from 3.4 percent in the two previous months, a sign that wage growth may start to pick up but inflation still remains far from the BOJ's 2.0 percent target.
    The yen has been easing against the U.S. dollar since December 2012 when Shinzo Abe was elected to his second term as prime minister on a platform known as Abenomics, a mix of fiscal stimulus, monetary easing and structural reforms.
    On the monetary front, Haruhiko Kuroda was appointed to head the BOJ and quickly implemented a program of aggressive monetary easing in April 2013 with the aim of ridding the country of 15 years of deflation and pushing up inflation to 2 percent.
    Initially, the BOJ's plan was to purchase 60-70 trillion bonds annually and then in October 2014 the target for purchases was raised to 80 trillion bonds a year.
    The impact on the yen from the BOJ's easing has been strong, with it dropping by 25 percent against the U.S. dollar in the second quarter of 2013.
    After leveling out in the first half of 2014, the ramped-up asset purchases last October pushed the yen further down and it has continued to ease.
    In response to the rate hike by the U.S. Federal Reserve, the yen fell to around 122 from 121 and today it was trading at 122.4 to the dollar, down 2.2 percent since the start of 2015 and down by 30 percent since the start of 2013.


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