Bank of Japan’s Policy Review, More Flexible ETF Buying

The BOJ will likely focus on measures to make its purchases of risky assets, including exchange-traded funds (ETF), more flexible. The economy comes under growing strain from a spike in coronavirus infections, according to a poll.

Analysts also revised down their economic projection for the fiscal year ending in March. It was on expectations a recent resurgence of Covid-19 infections would dent growth.

Economic activity could stall in Japan from pandemic curbs. Its central bank may have to look at more effective ways to achieve its 2% inflation target. This is as renewed infections force it to maintain its massive stimulus longer, analysts said.

Last month, the BOJ said it would undergo an examination of its yield curve control and quantitative easing policies. It was in search of ways to make them more “effective and sustainable”. 

Its findings will be released in March and new GDP estimates will be issued. That will be at its Jan. 20-21 policy meeting.

Thirty-one economists said the central bank would “make its ETF, J-REIT buying more flexible”. We can see this in the Jan. 7-18 poll when asked what steps to take when it unveils its findings in March.

Moreover, eight analysts said the BOJ would revise its three-tiered deposit rate system. That system applies negative interest rates only to marginal excess bank reserves. 

Two said it would change the 10-year bond yield target to other durations.

The BOJ will take up ways to scale back a controversial programme that buys massive amounts of exchange traded funds. That is without stoking fears of a full-fledged retreat from ultra-loose policy, according to sources.

State of Emergency

The Japanese government expanded a state of emergency it declared for the Tokyo area this month. That is to cover seven more prefectures last Wednesday amid a steady rise in COVID-19 cases.

The latest measures are likely to inflict less damage to the economy. This is when compared to the stricter and broader curbs imposed in April and May last year.

Furthermore, analysts expected the economy to contract 2.4% in January-March. This was in the poll conducted before the government’s decision to expand the state of emergency beyond the Tokyo area. Also, the poll predicted a 2.1% expansion in December.

The economy was forecast to shrink by 5.5%, for the current fiscal year ending in March. That’s slightly weaker than a 5.3% contraction projected last month.

In the fiscal year beginning in April, starting with 4.1% growth in the April-June quarter, the economy was likely to expand by 3.3%.

According to the poll, core consumer prices will slip 0.5% this fiscal year before rising 0.2% next fiscal year. These exclude volatile fresh food prices.

Economists were split on which direction the Japanese central bank will move when it next changes policy.

Out of 39 analysts, 21 forecasted the BOJ would scale down stimulus. Eighteen said it would ramp up monetary support.

The BOJ is likely to slightly revise up next fiscal year’s economic forecast. Moreover, it’s likely to hold off on expanding stimulus at its Jan. 20-21 policy meeting, sources said.