Instant View: BOJ overhauls policy, sets yield curve target

The BOJ maintained the 0.1 percent negative interest rate it applies to some of the excess reserves that financial institutions park with the central bank. But it abandoned its base money target and instead adopted "yield curve control" under which it will buy long-term government bonds to keep 10-year bond yields at current levels around zero percent.

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COMMENTARY:

CHRISTOPHER MOLTKE-LETH, HEAD OF INSTITUTIONAL CLIENT TRADING, SAXO CAPITAL MARKETS, SINGAPORE

"Overall it’s relatively positive that they’re going to target the yield curve control because this can help improve some of the biggest issues that we’ve seen, negative earnings for banks and so forth. And you also see a nice little spike in 10-year yields. All in all, it’s probably as good as we could have hoped for this time.

"But the longer-term issues for Japan are still more or less unchanged, unfortunately. Those are issues that monetary policy alone can’t solve. They would need to work with Prime Minister (Shinzo) Abe’s administration to make sure that Abenomics is adjusted to the needs that Japan has.

"You had a slight dovish tilt from the message today from Japan. Even though the (Federal Reserve) likely won't move tonight, you might see a slight hawkish tilt to the Fed announcement. So dollar-yen could continue a bit higher."

MARITO UEDA, DIRECTOR AT FX PRIME BY GMO

"The dollar rose to around 102.50 yen after the BOJ policy announcement.

"It's not clear what specifically drove the dollar higher, but the timing of the move suggests the market initially hesitated after the BOJ kept its negative interest rate unchanged, then pushed the dollar higher when it suggested it could leave the door open to more easing.

"On the assumption that the FOMC will hold rates steady later today, we're expecting the dollar/yen to move around 100.50-103.50 yen. There appears to be a lot of resistance above 103 yen."

MICHAEL MOEN, FIXED INCOME INVESTMENT MANAGER, ABERDEEN ASSET MANAGEMENT, SYDNEY

"They've given themselves more freedom in terms of which JGBs to buy. I would expect that the spread between the super long bond, the 30-year bond, and 10-year government bonds, is probably going to steepen over time. I'm not sure it's going to steepen significantly given that you've still got domestic investors in Japan who need to have some kind of yield.

"Certainly this is positive for the equity market too, especially bank stocks. Clearly, they've acknowledged the negative rate policy can hurt bank profits, and these measures they've announced today are in a way trying to offset some of that negative impact. So it's clearly positive for bank stocks and, over time, for the broader Japanese equity market too."

DIVYA DEVESH, FX STRATEGIST, STANDARD CHARTERED BANK, SINGAPORE

"The most important bit is commitment to overshoot the 2 percent inflation target. That's committing to continue easing for longer than previously expected. Also hinting that the balance sheet will remain large for a long time. We think that's dollar/yen positive. Also, markets are a bit relieved given no further cuts to interest rates."

NORIHIRO FUJITO, SENIOR INVESTMENT STRATEGIST, MITSUBISHI UFJ MORGAN STANLEY SECURITIES, TOKYO

"The central bank's decision to keep the 0.1 negative interest rate gave the impression that the BOJ gave full consideration to banks' businesses.

"There had been speculation in the market that the BOJ would buy TOPIX-linked exchange traded funds for a while. Now that the BOJ announced it, it means it understood the market's concern that its effort to buy Nikkei-linked ETFs was distorting valuations and liquidity in some individual stocks.

"Overall, the outcome was positive for the stock market."

KARINE HIRN, PARTNER, EAST CAPITAL, HONG KONG

The BOJ decision wasn't a big surprise as the markets were expecting some form of policy easing, though the latest bunch of measures may not be a big driver for the markets especially with a Fed decision close and the outcome of the U.S. elections looming.

Risk markets have been accustomed to more policy easing over the summer and the realization is gradually sinking in that may not be the case going into the year-end. We expect more choppiness and uncertainty in markets in the coming days.

TIM CONDON, CHIEF ECONOMIST ASIA, ING, SINGAPORE

"They seem to be determined to get the message to the market that they are going to stay on course and continue to buy bonds until they get the inflation rate above 2 percent.

"I don't think it's going to be easy to get the 2 percent. It's an Abenomics problem, not the Bank of Japan's problem. It may take helicopter money in Japan to get the 2 percent. But the authorities have said that 'we are not going to do that.'"

SIM MOH SIONG, FX STRATEGIST, BANK OF SINGAPORE

"It's reacting more to the desire to get a steeper yield curve.

"The steeper yield curve will benefit the financial sector and this is why the shares are up and therefore dollar/yen is up. So dollar/yen seems to be reacting to the stock market, which in turn is reacting to the steepening of the yield curve that the BOJ wants.

"The measures announced by the BOJ don't add a lot of stimulus into the system.

"I think it's not meant that way anyway. If you look at Japan we're in a situation where the economy itself seems to be doing okay relative to the growth potential, if especially you look at the labor market.

"So there isn't a lot of strong arguments as to why the Bank of Japan should be adding a lot of stimulus.

"The message is to address some of the side effects of the monetary easing that's been done in the past, and one of the side effects has been that negative rates as well as the flattening of the yield curve has hurt the financial sector. So I think today's move is to address this side effect."

SHANE OLIVER, CHIEF ECONOMIST, AMP CAPITAL, SYDNEY

"The BOJ seems to have done the minimal to satisfy the markets. There were worries they were running out of government bonds to buy and would cut back on that. Well, they haven't. There was all the talk that the bank had given up. Well, they've clearly shown they are ready to do more. They seem to be positioning for a long-term war on deflation, rather than a quick battle.

"In the end, I think they will have to do more, and that it will be some form of helicopter money. Either directly funding fiscal spending or forgiving the government debt it holds. That's the only way to get the cash into the economy where it can be spent."

ATSUSHI TAKEDA, CHIEF ECONOMIST, ITOCHU ECONOMIC RESEARCH INSTITUTE, TOKYO

"The main point for the BOJ's decision is that the bank set long-term yields as a target. The central bank is giving certain consideration to the financial industry by trying to work on the yield curve.

"The BOJ changed its policy framework significantly as the central bank previously did not show much attention to the yield curve.

"We can take the BOJ's decision positively as the bank is trying to find more effective ways.

"The BOJ has done what it could do and the onus now is on the government to push forward with its growth strategy."

KATSUTOSHI INADOME, SENIOR FIXED INCOME STRATEGIST, MITSUBISHI UFJ MORGAN STANLEY SECURITIES

"The impression is that the BOJ is starting to pull back some of its troops from the battlefront. The markets could now begin testing the BOJ's commitment to its price target in the next few months, just as the Bank of England and its commitment to the pound was challenged in the past."

AYAKO SERA, MARKET ECONOMIST, SUMITOMO MITSUI TRUST BANK, TOKYO

"It will take some time for the markets to fully interpret all of the implications of the BOJ's changes.

"It does give somewhat of an impression of further easing, targeting the 10-year yield at zero and setting a yield curve target. Overall, that does seem like an easing, but we really don't know if it will have the actual impact of an easing on the market, and it will take some time to find out.

"I believe that if there weren't a Fed meeting later in the day, the yen might have weakened on the BOJ's announcement.

"As for today's stock market gains on the BOJ's news, the question is whether they're sustainable."

SEAN CALLOW, SENIOR CURRENCY ANALYST, WESTPAC, SYDNEY

"First thoughts are credit to the BOJ for having put a lot of thought into a new approach; they do seem open to fresh ideas. But it is hard to see the initial gains in USD/JPY being sustained. Keeping the depo rate at -0.1 percent and not boosting asset purchases doesn't seem a recipe for yen depreciation. Moreover, the vagueness of the timetable to reach 2 percent inflation is not inspirational.

"And while the inflation-overshooting commitment is an interesting surprise, it relies on the public placing a lot more faith in the BOJ reaching its target than it has up till now. They failed to get to 2 percent, so why should we think they can get to 3 percent?"

YASUTOSHI NAGAI, CHIEF ECONOMIST, DAIWA SECURITIES, TOKYO

"Clearly, there was a change in policy framework, which was a surprise. But that also suggests what they have been doing wasn't good after all.

"It's not clear what they think about an exit strategy. Will they keep the 10-year bond yield at zero percent even as prices go up?

"Since the BOJ is saying they want the 10-year yield at zero percent, the market will probably follow. It won't pick a fight with the BOJ for the time being.

"But there will be a problem when the BOJ needs an exit from the current framework. We could see big confusion in the market."

(Reporting by Hideyuki Sano, Wayne Cole, Lisa Twaronite, Shinichi Saoshiro, Kaori Kaneko, Masayuki Kitano, Jongwoo Cheon, Saikat Chatterjee, Ayai Tomisawa, Naomi Tajitsu, Nichola Saminather)