BoJ needs to regain the initiative in communication and act decisively - AGFxC

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that the BoJ have lost the communication battle, they have been impotent in the face of market pressure via a stronger JPY and now proven indecisive and reactive in the face of criticism of its QQE/NIRP policy.

Key Quotes

“They should try to regain the initiative.  They should reassert their intention to push ahead with QQE, perhaps even increase the pace of purchases.  To recognize the fear the market has that it will devour all government debt, it could set a threshold for its purchases once they reach 50% of outstanding government debt.  At which point they could revert to a policy of continuing its purchase plan only if 10-year yields rise above zero, until it meets its inflation target.

It should highlight that if the government raise fiscal spending and its debt outstanding, this will allow the BoJ more scope to expand its QE purchases for longer until it reaches its 50% threshold, creating an atmosphere that the Bank is already approaching something resembling helicopter money.

In conjunction with this plan it should reiterate its intention to purchase bonds regardless of how far yields fall below zero in the meantime and argue forcefully in public and private meetings that low and negative yields should inevitably drive investors out of JGBs and weaken the JPY, both of which are the policy intention.

Ideally, FX intervention should be used to reinforce a weaker JPY trend, sufficient to reverse much of the JPY gains this year.

At this stage, we have little idea of what the BoJ intends to announce at its 21 September meeting or beyond with respect to its review of policy.  This uncertainty has already resulted in a rise in JGB yields and renewed gains in the JPY.  The uncertainty over policy direction may well continue to push JPY until the BoJ takes back the initiative.”