Bank Of Japan Tweaks ETF Program, Adds Flexibility On Yields, Introduces Forward Guidance On Rates

After what was an unusually long delay, presumably reflecting careful deliberation considering recent dramatic moves in Japanese bond yields, the Bank of Japan finally released its July policy decision.

This comes after days of speculation regarding whether the bank would move to tweak things in an effort to i) mitigate the deleterious effects of bond buying on JGB market liquidity and bank margins and ii) adopt a more sustainable approach with regard to ETF purchases.

In the decision, the BoJ kept the policy rate unchanged and maintained the 10Y yield target (~0%), but did indicate they would allow for more flexibility in bond operations. Also unchanged are the bank’s planned purchase ranges for monthly bond ops in August from July. Amusingly, Kuroda and co. say they’ll “allow upward and downward movement” in 10Y yields. Here’s the actual quote:

[While keeping the 10Y yield at about zero percent], the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices.

On Monday, the bank was forced to step in with the third fixed-rate operation in a week as yields continued to bump up against 0.11% in anticipation of possible policy tweaks.


The BoJ also introduced some forward guidance on rates, which will stay “very low” for “an extended period of time”. That, apparently, is supposed to be viewed as a renewed commitment to achieving the ever elusive inflation target.

Additionally, the BoJ says it will shift the ETF allocation more towards the Topix from the Nikkei, in keeping with the notion that policymakers are keen on avoiding a situation where market functioning is impaired. As a reminder, it is by no means clear how (or even if) the bank can ultimately unwind its equity book.



The inflation forecasts were slashed for this year, FY2019 and FY2020, underscoring, well, underscoring the reality of the situation, which is that they are miles away from their target. Still-sluggish inflation was one of the main reasons why it made sense to avoid coming across as hawkish on Tuesday – any perceived change in policy would almost surely have been accompanied by yen strength, which would be a decidedly unwelcome development with inflation still running as low as it is.

The knee jerk reaction to the news betrays a market that’s relieved. USDJPY rose and 10Y JGB yields fell more than 2bps. According to traders who spoke to Bloomberg, some folks who came in short USDJPY “flipped their positions across electronic platforms” when the decision came down.

Take all of this for what it’s worth. It will likely be hours before USDJPY “decides” what all of this means. As for JGBs, well, you can draw your own conclusions as to just how much “upward” and “downward” movement the BoJ will ultimately be prepared to tolerate.


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