The ‘New’ Bank of Japan - Sanjeev Gupta
T
he Bank of Japan (BoJ) is under a clear transformation. While the first term of Kuroda’s governorship was defined by his ultrareflationary monetary policies aimed at reversing two decades of deflation in Japan, his second term will be remembered by his success (or lack thereof) in maneuvering Japan out of the aforementioned policies. The dramatic shift in stance is evidenced by an article on Reuters titled “BoJ’s architect of ‘shock and awe’ plots retreat from stimulus (August 6th)” which reports that the BoJ had originally intended to raise short-term rates twice this year, before getting discouraged by the market volatility seen in February and later by the decline in inflation.
Unfortunately for Japan, Kuroda’s aggressive experiment in ultra-loose monetary policy has failed to stoke inflation towards the BoJ’s espoused 2% target with the latest reading for core inflation (ex-fresh food and energy) at a disappointing 0.0%... This is despite 80 trillion yen of annual JGB (Japanese Government Bond) purchases, 6 trillion yen of equities purchases, negative short-term rates and a 10-year JGB yield anchored at 0%! Instead of generating inflation, Kuroda’s policies on negative interest rates had the unintended consequence of severely hurting the margins at Japanese Banks. BoJ’s miscalculation lies in the fact that (unlike US or EU banks) Japan’s banks receive a majority of their funding via individual customers deposits on which they hardly pay any interest to customers. In addition, banks are unable to charge individual customers on these deposits. This meant that while the rate at which Banks lent money fell significantly, Banks did not see a commensurate decline in funding (deposits) costs. This significantly hampered Japanese Banks’ ability to earn a spread (margin) on loans. The market reaction was telling: Japan Bank stocks fell 28% in the weeks following the announcement. Alas, Bank shareholders can rejoice as these policies may be finally set to reverse. The market received its first concrete indication of a monetary policy taper in the BoJ’s latest Monetary Policy Meeting. At the meeting’s conclusion, Kuroda announced that the BoJ will allow the 10-year JGB yield to move as high as 0.2%, double the previous range. This move makes sense, as multiple years of ultra-loose monetary policies have failed to stoke inflation and instead have created unintended harmful sideeffects, as mentioned above. Furthermore, global Central Banks are moving towards monetary Policy Tapering (i.e. reduction of quantitative easing) and BoJ risks getting ‘behind the curve’. Bank stocks have reacted in kind, rebounding from their July lows. However, you can expect further gains over the next few months as the market fully digests the ‘new’ BoJ and its focus on reviving profits at Financial Institutions!
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Durga Puja 2018
69