The Bank of Japan (BoJ) did not ease further at its September meeting but adopted a new policy framework, “Quantitative and Qualitative Monetary Easing with Yield Curve Control” (QQEYCC), which consists of 1) yield curve control and 2) inflation-overshooting commitment based on its comprehensive assessment. Regarding yield curve control, BoJ aims to maintain the yield curve around the current level (eg, 10y JGB around 0%) by controlling both short- and long-term interest rates. Under the inflation-overshooting commitment, the BoJ intends to continue expanding the monetary base until core CPI stably exceeds 2% y/y instead of the previous time-based horizon of two years.
For additional easing options, the BoJ explicitly mentioned 1) cuts to short-term interest rates; 2) cuts to the target level of long-term interest rates; 3) expansion of asset purchases (qualitative expansion); and 4) accelerated monetary base expansion, but only “if situation warrants.”
Our Japan economics team now expects a rate cut (from- 0.10% to -0.30%) at the next MPM on 31 October-1 November.
While the case for medium-term JPY appreciation remains intact and a shallower Fed hike path may put downward pressures on USDJPY, BoJ’s deeper negative rates expectation could potentially slow down the appreciation path.
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