As expected, the Bank of Japan (BoJ) left its leading O/N target rate unchanged at 0.1% in a unanimous decision by the board members. A majority of the BoJ board believes that cutting interest rates all the way to zero will prevent the money market from working appropriately. Hence we are unlikely to see another cut in the leading interest rate. Instead the name of the game is quantitative easing (the BoJ prefers to call it non-conventional easing). In connection with today's meeting the BoJ announced further measures to step up quantitative easing.

* The BoJ will increase the outright purchase of government bonds (JGBs) to JPY21.6trn (JPY1.8trn monthly) from JPY16.8trn previously (JPY1.4trn monthly). Hence the BoJ's planned purchase of government bonds over the next 12 months will be about 3.2% of total outstanding JGBs. This move by the BoJ was expected, albeit the purchase target was slightly higher than expected.
* Yesterday the BoJ announced it will start buying subordinated debt from Japanese banks. The limit for the BoJ's purchase of subordinated debt will be JPY1trn. The purpose will be to boost banks' capital bases following the sharp drop in stock prices over the past few months. The BoJ will introduce this instrument because its programme to purchase stocks from financial institutions has had little popularity among banks (partly because such sales would force banks to realise losses on their stock holdings, which would hurt their capital bases even more than just having unrealised stock losses on their balance sheets).
* Besides these new measures, the BoJ's quantitative easing measures now include purchase of commercial papers, purchase of corporate bonds (maturity less than one year) and providing access to liquidity on longer-terms maturities on the money market.

The BoJ's quantitative easing has to date been modest compared with other central banks, if quantitative easing is measured by the increase in the central bank's balance sheet and base money (see chart 1). However, based on the BoJ's recent initiatives, we are likely to see the BoJ start to catch partially up in the coming months despite board governor Shirakawa sounding a bit cautious about further quantitative easing at the press briefing. At the press briefing Shirakawa said that he only sees limited room for further increase in the BoJ's purchase of JGBs.

Outlook: The BoJ is cautiously stepping up its quantitative easing and at this stage it will probably prove to be an important contribution to preventing an unwelcome appreciation of JPY. While we believe the BoJ might step up its quantitative easing further, we do not expect Japan to take the lead from the Swiss central bank and include intervention in the FX market as a quantitative easing tool.

Impact: Today's BoJ measures were largely expected and there has been no major impact on either JPY or Japanese bond yields.

BoJ View of the Economy

Bank of Japan board members