BoJ Launches More Easing
The Bank of Japan surprised the market by announcing another round of easing – and a fairly substantial one at that. The lifetime of the Asset Purchase Program was extended by 6-months and its size was increased by JPY 10 trn. The increase is to be evenly split between JGBs and T-bills, and the BoJ now hopes to hit the new higher APP target of JPY 80 trn by end-2013. A small technical adjustment was also made to the bidding process at the auctions the BoJ uses to buy JGBs from the market. Previously, JGB holders who wished to participate were not permitted to submit a bid below 10bp and, with market yields already at that level, bondholder participation had been in decline. The BoJ has now scrapped that minimum yield on APP purchases, which should ensure greater bondholder participation in future and so will help ensure the BoJ succeeds at hitting its easing targets. We stress however that the interest on reserves held at the BoJ will still be paid at 10bp and, due to arbitrage opportunities, this will remain an effective floor on JGB yields. We see the overnight move in USDJPY as justified, but would be reluctant to chase it higher at these levels. In the US meanwhile, data surprised to the upside with the current account deficit in Q2 narrowing to 3.0% of GDP from 3.5% in Q1 and NAHB Housing market index rising to 40 in September. FOMC members Dudley and Evans were on wires backing the Fed’s policy decision. Evans noted that the unemployment rate will fall below 7% by the end of 2014 due to QE3. Dudley acknowledged that Fed tools “aren’t perfect” for stimulating growth but that the central bank is “not out of ammunition” for more measures. Ahead today, Bernanke is scheduled to meet with the Senate Finance Committee to discuss economy and ‘fiscal cliff’, but no major announcements are expected after the private meeting.
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UBS Investment Bank