BoJ has effectively begun to taper JGB purchases - HSBC

Analysts at HSBC believe the Bank of Japan (BoJ) has effectively begun to taper JGB purchases, as annual increases in holdings by the central bank have almost halved in pace from the committed "around" JPY80trn per annum.

Key Quotes

“This should not impair its ability to control the 10y JGB yield at its current target of 0.0% nor does it largely affect the extremely loose monetary stance. Maintaining expectations for both financial markets and economic agents will be critical going forward. Any loss of confidence in the commitment to structural reforms and monetary policy would quickly render easing ineffective.”

“In terms of fiscal policy, the government plans to go ahead with the consumption tax rate hike from the current 8% to 10%, in October 2019. However, the fiscal policy stance will turn more supportive of growth. Indeed, PM Abe announced his plans to seek a JPY2trn fiscal package together with the snap election announcement, which will partly be funded by the VAT hike, estimated to be JPY5trn, if required. The additional budget is likely to be allocated for “human resource development”, his new policy slogan, making pre-school education free for all children aged 3-5 and providing young child care for low-income families. All this will mean that the government's target to reach a primary fiscal balance by FY2020 is likely to be postponed.” 

“Risks

Prime Minister Shinzo Abe has called a snap election for the lower house, where voting will most likely occur on 22 October, according to several media sources (e.g. Bloomberg). We have highlighted that policy continuity is key for Japan. Any doubts about the direction of Abenomics, including extraordinary monetary easing, could have severe repercussions in markets and indeed the economy. The general election results will reveal how much support the Abe government has for its policies, often summarized by the three arrows, and thus will shed some insight to their durability.”