BoJ: QQE with yield curve control - RBS

Research Team at RBS, notes that the BoJ has moved away from ‘rigid’ targets for balance sheet expansion and toward forward guidance.

Key Quotes

“Its decision to target 10y yields explicitly at 0% should not be revolutionary for 10y yields, which have traded between ­0.05% and 0% for most of September. But it now targets explicitly what ‘guidance’ only achieved implicitly: a level of long term yields.

With yield curve control, it moves away from the front end as the policy target, where it disappointed our expectations of a rate cut.

It has also strengthened its guidance on its inflation objectives by adding an "inflation-overshooting commitment" in which the Bank commits itself to expanding the monetary base until the year­-on-­year rate of increase in the observed consumer price index (CPI) exceeds the price stability target of 2 percent and stays above the target in a stable manner.

Has the BoJ acted out of weakness? Has it been forced to do this by practical limitations to what it was doing? Although explicit targeting may be cheaper for the BoJ in terms of total purchases, it officially expects its total purchases to continue at around the current JPY80tn annual rate.

Will markets bet that 0 is a floor for JGBs and increase selling at that level? Or will markets assume that this "policy rate" can be cut further? These will be key questions for both the market and the BoJ over coming months. Note that the BoJ has anticipated this: the Bank can cut the short­-term policy interest rate and the target level of a long­-term interest rate, which are two key benchmark rates for yield curve control. (Emphasis added.)

Would the ECB share the assessments made by the BOJ? Could it target AAA average yields for example? We don’t think so.

The ECB likes market discipline. It also needs a framework that takes care of the region's that need most accommodation. This kind of approach isn't likely to appeal to the hawks who like market discipline and have explicitly encouraged continuation of quotas determined by the capital key, and it won't satisfy the doves either.

In other measures, the BoJ increased the maturity of liquidity absorbing operations from 1 to 10 years. This sounds along the lines hinted at by Coeure in his Jackson Hole speech, in which he indicated that there may be a need for the central bank to help meet demand for assets at longer maturities. Nevertheless, we do not think this is a possibility for the ECB, because this would look too much like Eurobonds by the back door.”