BoJ: Policy options dilemma - AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, notes that the media and market commentary suggest that the BoJ is not in one mind as to what it should now do to restore the effectiveness of its policy.

Key Quotes 

“In our view, they need to address the strength in the JPY.  If the government would intervene with a mind to cap the gains in JPY or the BoJ would introduce a policy of buying foreign bonds, this would be a valuable addition to policy.  But these policies appear totally off limits.

The next best thing may be to further increase the cost of hedging foreign investment by lowering negative interest rates.  And pull-back on longer-term bond purchases, since yields have already fallen to irrationally low levels and may be having counter-productive effects via increasing savings, lowering inflation expectations and dampening economic confidence.  It is hard to see the point in continuing to buy longer-term bonds, perhaps beyond 5-year maturities, at yields below zero.

If the BoJ implements these policy options it may be effective in reversing some of the negative unwanted consequences of its current policy settings and restore some faith in its capacity, in time, to reach 2% inflation.  A more normal upward sloping yield curve with negative yields from one to three years and positive yields further out the curve might be conducive to stronger economic confidence in Japan.”