What the Bank of Japan Can Do - BBH
According to analysts from Brown Brother Harriman, the Bank of Japan
could cut the deposit rate further into negative territory and/or
increase the assets it is currently buying or it could offer new types
of credits.
Key Quotes:
“If the BOJ
does not ease policy, the risk is renewed yen strength, a backing up of
JGB yields and a sell-off in the Japanese equities.”
“Because of
the G7/G20 agreement that makes intervention in the foreign exchange
market difficult, monetary policy is all the more important.”
“What
can the BOJ do? There seems as if there are a fixed number of
possibilities for what the BOJ calls Qualitative and Quantitative Easing
with Negative Rates. In terms of quantitative easing, it can increase
the assets it is buying from the current target of JPY80 trillion a
year. If the government is considering a new long-dated bond issue, to
fund recovery and reconstruction, it is yet another instrument the
central bank can buy.”
“The BOJ can cut its deposit rate deeper
into negative territory. It can increase the fraction of reserves at
the BOJ that are assigned a negative interest rate. There has also been
some suggestion that the BOJ can offer negative interest rate loans, as
the ECB will under certain conditions.”
“In summary there are two
big unknowns. What will the BOJ do and how will the markets respond?
Given the BOJ's penchant for surprising the market and the
counter-intuitive market response, one cannot have much confidence in
the answer to either question.”