Bank Of Japan Takes Gloves Off. Says ‘No Limit’ On Bond Buying

As expected, the Bank of Japan pledged to buy more assets on Monday at the conclusion of its April meeting, which was shortened from two days to one.

Going forward, the BoJ will purchase the “necessary amount” of JGBs with no upper limit, the bank said, joining the Fed in pledging unlimited support to counter the expected drag from the coronavirus. The old target for JGB purchases was around 80 trillion yen per year. In addition, the bank upped the limit on corporate bond and commercial paper purchases.

The policy rate and 10-year yield target remained unchanged. The bank said it will “conduct further active purchases of both JGBs and T-Bills for the time being, with a view to maintaining stability in the bond market and stabilizing the entire yield curve at a low level”.

The forward guidance was tweaked. It says the bank expects “short- and long-term policy rates to remain at their present or lower levels”, but scraps a reference to the necessity of paying “close attention to the possibility that the momentum toward achieving the price stability target will be lost”.

The Japanese economy, the bank says, will persist in a “severe situation” attributable to COVID-19. The GDP forecast is now -5% to -3% for FY2020. The bank sees core CPI including sales tax at -0.7% to -0.3% for 2020 and 0% to 0.7% for 2021.

Despite having now pledged to purchase unlimited amounts of JGBs (and having recently increased ETF buying), the BoJ said Monday it won’t hesitate to deploy more easing if necessary.

Just to run through the numbers again, the economy contracted 7.1% in the fourth quarter of 2019 (revised lower from the preliminary print). That was the worst performance since Q2 2014, a period which, like Q4 2019, was marked by a tax hike. When you toss in a typhoon and the deleterious effects of the trade war, you end up with a precarious situation.

The delay of the Tokyo Olympics was insult to injury.

A recession is now assured. Last week, the flash PMI for the services sector was a predictable disaster, tumbling to 22.8 from 33.8 in March. That was (obviously) the lowest reading in series history, and it marked the third straight month of contraction.

Japan has been spared the worst of the COVID-19 epidemic, but many Japanese have been living under a state of emergency nonetheless.

Shinzo Abe this month unveiled a record fiscal package, but it won’t matter. Some analysts see the economy contracting as much as 20% (annualized) QoQ in Q2 after a contraction in the first quarter. That would mean three consecutive quarters in contraction.

On the bright side, Abe won’t have to wonder where the demand will come from for any bond issuance associated with the unprecedented fiscal stimulus he rolled out a few weeks back.