The Daily Update - BoJ and uncertainty

Growth or the continued weak state of it remains a continuing theme for global investors. Not surprisingly, Japan which is also grappling with negative structural trends (ageing population, lack of immigration, secular stagnation and the need for greater structural reform) is receiving a lot of attention as it is one of the furthest down the route of deploying unconventional policies.  More questions are being asked about whether they are reaching the stage of deploying helicopter money, particularly following Ben Bernanke’s recent visit to Tokyo.

Despite Japanese growth continuing to languish and the July inflation print remaining negative (-0.4 percent yoy) Haruhiko Kuroda, the Governor of the BoJ, opted for a tamer approach instead leaving the monetary base expansion at JPY80tn per annum, negative rates unchanged at -0.1 percent, increasing ETF purchases to JPY6tn from JPY3.3tn and expanding the special dollar lending facility to USD24bn from USD12bn. So far comments from Haruhiko Kuroda, the Governor of the BoJ, appear to rule out helicopter money and the accompanying blurring of the institutional boundaries between central bank driven monetary policy and government and parliamentary determined fiscal policy.  Today he is reported to have said “I don’t think at all that either quantitative easing or our interest rate policy has reached limits” implying more of the same.

The announcement earlier this week of plans for a JPY28tn (USD265bn or ~5.6% of GDP) fiscal stimulus package has also allowed the BoJ time to assess its policy, although for some in the market this was a missed opportunity and thus JGBs sold off and the yen appreciated against the US dollar to ~103.31 (at the time of writing).  The details of the stimulus package are expected next week and the key issue will be how much of the headline figure is actually new spending and over what timeframe this will take place.

Nevertheless, the issue of whether the BoJ had already hit the limit in terms of JGB buying continues to be debated given that the BoJ owns ~37.4% of the JGB market and seems to be reaching some constraints in terms of liquidity.  While shifting the yield curve into negative territory has reduced the cost of the government issuing/refinancing more debt it has hurt bank profitability, not boosted loan growth (2% yoy excluding trusts in June) or seemingly encouraged domestic consumption.

Elsewhere, as we highlighted last week, the IMF had cut its growth estimates due to a perceived negative impact from Brexit: their 2017 estimate for the UK was one of the larger downgrades being slashed by 0.9 percent to 1.3 percent.  Interestingly, the news-flow around UK investment projects this week perhaps provides a glimmer of hope that the hit to investment may not end up being as great as initially feared.  GlaxoSmithKline this week announced that they had decided post-Brexit to go ahead with a GBP 275m investment project at 3 drug manufacturing sites noting the positives of the UK’s skilled workforce and an attractive tax regime. Added to this, the EDF board approved the final investment decision for the Hinkley Point nuclear power project on Thursday, although the government has since put the project up for another review. What is clear is that any UK growth and investment forecasts now come with a lot of caveats and low confidence levels.

Brexit, the rise of populist politics across Europe, the US election and unconventional monetary policies are bringing a great deal of uncertainty to global markets making high quality bonds from creditors, particularly those offering positive yields, remain one of the more attractive places to be positioned.