Although the Bank of Japan (BOJ) left the 10-year government bond yield at around zero percent and the shortterm interest rate target at -0.1%, it announced a set of monetary policy changes for the first time in almost two years, outlining a more flexible policy designed to let long-term interest rates “move upward and downward” as policymakers look to create more flexibility to continue unprecedented monetary stimulus.

We feel it is a sign that the BOJ is giving itself more flexibility in regard to asset purchases than to envisage that the BOJ is moving towards monetary tightening given that it has acknowledged the challenge in meeting the 2% inflation target. While the policy statement is expected to have minimal impact on the GDP and inflation, we believe the increasingly complex policy stance forces us and the market to scrutinise closely on the pace of asset purchases to determine if the changes amount to a strengthening or weakening of stimulus.

While the most likely scenario will be that the BOJ will see how to continue easing for longer period and at the same time take into account of the negative knock-on effects, we remain conscious of the possibilities of a future policy shift i.e. tightening. Any policy shift should see the yen strengthen more than 110 against the dollar.

• The Bank of Japan (BOJ), as expected, maintained its target for the 10-year government bond yield at around zero percent and the short-term interest rate target at -0.1%. However, the BOJ highlighted that the yields may move up or down "to some extent, mainly depending on developments in economic activity and prices”.

• Besides, the BOJ acknowledged that it will take "more time than expected" to achieve its inflation target of 2%. Consumer prices are expected to be around 1.8% in the fiscal year 2018/2019 and projected inflation to reach 2% in the fiscal year 2019/2020.

• The BOJ’s decision came after much talk that it could be discussing changes in the policies. It led to Japanese government bond prices falling steeply, driving the benchmark 10-year yield to its highest in nearly six months. Following the announcement, we found the US 10-year Treasury dipping almost 3 basis points to 2.95% while the yen weakened against the USD by 0.25% to 111.33.

• We are of the view that the policy tweak is fairly small to have an impact on the economic growth and inflation. Our view that inflation will fall short of the BOJ's 2% target remains unchanged. The economy still needs stimulus programme to meet the 2% inflation target.

• Hence, such as move in our view is more to create monetary flexibility to achieve the 2% inflation target than to throw cold water on its commitment on monetary stimulus despite some may perceive that the BOJ could be suggesting that the policy is heading towards tightening.

• We believe the increasingly complex policy stance forces us and the market to scrutinise closely on the pace of asset purchases to determine if the changes amount to a strengthening or weakening of stimulus. While the most likely scenario will be that the BOJ will see how to continue easing for longer period and at the same time take into account of the negative knock-on effects, we remain conscious of the possibilities of a future policy shift i.e. tightening. Any policy shift should see the yen strengthen more than 110 against the dollar.

Source: AmInvest Research - 1 Aug 2018