BoJ Adopts An Inflation ‘Target’
As widely expected, the Bank of Japan jettisoned its 1% inflation ‘goal’ overnight and adopted at 2% inflation ‘target’ in its place. It aims to reach the new target at “the earliest possible time”. Unfortunately, to us, the additional easing announced does not seem commensurate with the challenge. The policy rate and the interest rate paid on excess reserves were both left unchanged and what little fresh easing there is will be delivered entirely through the Asset Purchase Program. There was no change to APP guidance for 2013 – as communicated previously the Bank aims to increase its stock of T-bills and JGBs over the course of 2013 by JPY 15 trn and JPY 20 trn respectively. This much we knew already, but the overnight announcement provides the first guidance into 2014 and beyond. Disappointingly, the BoJ announced its intention to buy only JPY 10 trn worth of assets (T-bills and JGBs) throughout the whole of 2014 (net of redemptions). That’s over three times slower than the current pace of asset accumulation – totally inadequate in our view given the enormity of the challenge of generating 2% inflation. Granted, the BoJ shifted to an “open-ended” framework for giving future APP guidance, but we do not see this as a significant development – it signals the Bank’s willingness to keep easing for as long as it needs to, but the policy language already made that abundantly clear. Overnight EURUSD traded 1.3297-1.3319 and USDJPY 88.89-90.18
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UBS Investment Bank